EVERY few months, the issue of the €9 billion ELA (emergency liquidity assistance) drawn by Laiki Bank and passed on to the Bank of Cyprus, slips into the news. Politicians will make a little fuss, radio shows will invite a couple of guests to give their views and there will be a few articles in the press. Once this ritual is completed, the matter is forgotten until the next time something is said to remind us of it.
The latest bout of ELA-talk was triggered by an article that appeared last week in the New York Times and suggested that Laiki had “inflated the value of its collateral to secure more loans.” This view was expressed by the head of the Bundesbank, at a meeting of the ECB’s governing council. He had also argued, according to the minutes of the meeting in December 2012 that “it was not the governing council’s job to keep afloat banks that were awaiting recapitalisation and were not currently solvent.”
Governor of the Central Bank at the time Panicos Demetriades claimed he was obliged to draw ELA because if Laiki collapsed the whole banking sector would follow and the state would be bankrupted as it would not be able to cover insured deposits. Closing down the bank before the assistance programme was concluded, would have been disastrous for the economy argued Demetriades, directly blaming the Christofias government for delaying signing a memorandum of understanding.
Apart from allowing ELA to reach €9bn the Christofias government had also put €1.8bn of the taxpayer’s money into Laiki in May 2012 – an amount that has been added to the public debt – knowing full well that the bank was insolvent. The handling of Laiki had been nothing more than a catalogue of errors by both the government and Central Bank, which chose to put off the tough decision for as long as possible.
As for the supervision of the Central Bank, it could only be described as inadequate, given that it allowed the situation to veer completely out of control. Yet, interestingly, none of its directors, who were taking the important decisions, were forced to step down, in contrast to half the top executives of the Bank of Cyprus whom Demetriades ordered to resign. Once again, the civil servants and governors, who were supposed to supervise the banks and ensure good practices were followed but failed, took no blame.
Perhaps, bringing up the issue of ELA every few months serves a useful purpose. It is a reminder of how politicians and top civil servants would always choose the least painful option, even when they know this is not in the in the country’s interest.
