THE ROLE played by the Governor of the Central Bank Panicos Demetriades in the procedure for the re-capitalisation of the Cypriot banks can only be described as disastrous. We do not know what his brief from the government was when he was appointed last May, but his decisions appear to have pushed the banking sector as deeply into the mire as was possible. If the role of a Central Bank Governor is to punish banks as harshly as possible for their transgressions, then Demetriades has been successful.
On the other hand there are some who believe that the prime responsibility of a Governor is to protect a country’s banking sector, given its critical importance to the rest of the economy. Demetriades, however, has acted more like a punisher than a protector. Perhaps these were the instructions he had when he was appointed by the Christofias government which has been waging a vicious campaign against the banks, in its ongoing efforts to avoid all responsibility for the big mess the economy is in.
The truth is that from the first few weeks in his new job the Governor directed his fire against the banks, promising to clean up the mess and punish those responsible. In fairness, the banks were not models of corporate governance – they had over-expanded, invested heavily in Greek government bonds, had not been very prudent in their lending and, as a result, needed financial assistance from the state to meet their re-capitalisation needs. In this regard the Governor could have been more helpful than he was.
Instead, in early July, before a consultancy firm had even been hired, the Central Bank leaked to a daily paper that the recapitalisation needs of the banks would be in the region of €10billion. It was as if the amount had been decided and that the consultancy firm which would be commissioned to estimate the recapitalisation needs would have the job of confirming this amount, which is more or less what has happened.
Interestingly, the Governor did not sit on the steering committee – consisting of representatives of the troika, the Central Bank and finance ministry – that would have decided the methodology and agreed the assumptions on which the Pimco consultants would estimate the total amount of financial assistance for the bank. It was incredible that Demetriades did not want to have a direct say on how the final sum of financial assistance would be calculated and try to keep this at a manageable level. He was represented on the steering committee by a Central Bank official.
Worse still, Pimco refused to have any contact with the banks when it was calculating their funding needs. In contrast, Black Rock, the consultancy firm that was hired to do the same job for Greece’s banks, worked closely with the executives of the Greek banks and jointly decided the financial assistance needs. Why did Demetriades not insist that the same procedure was followed in Cyprus, but instead allowed Pimco’s analysts to work on their own without having any contact with the Cypriot banks?
Only this week, after everything had been decided, Pimco finally made contact with the Cypriot banks, informing them of the astronomical amounts they would require and telling them that arbitrary assumptions on which the calculations were based could not be changed. And the Governor washed his hands of the situation, presumably content that Pimco had come up with a figure that would make the Cyprus public debt unsustainable and cripple the banks for many years.
