Cyprus Tries To Rebuild Banking System

Rocked by 4.5 billion euros ($6.17 billion) in losses because of bad loans to Greek banks that went under, and huge holdings in devalued Greek bonds, the Cypriot banking system that was bailed out by international lenders still needs a complete overhaul, a commission of experts has advised.

The four-member Independent Commission on the Future of the Cyprus Banking Sector says the government must prove it can live up to the terms of its rescue and try to shed capital controls as quickly as possible to restore credibility in the state banks.

Cyprus in March accepted a 10 billion euros ($13.71 billion) rescue from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) but that came with onerous conditions, including confiscation of 47.5 percent of bank accounts over 100,000 euros ($137,100) and a 300 euro ($411.25) daily limit on withdrawals for customers.

Businesses have only slightly better terms and find themselves unable to operate normally nor tap accounts that have been seized by the government to pay for the mistakes of the banks. No banker has been prosecuted.

All that has left the sense that Cypriot banks are still unstable and the commission said that Cypriot authorities need to focus on rebuilding the bailed-out country’s gutted banking sector and eliminate controls on money flows.

“A clear schedule of steps needs to be laid out to reconstitute [Bank of Cyprus] and the cooperative sector, so that capital controls are lifted and uncertainty removed,” said a summary of the commission’s recommendations that The Associated Press obtained.

The controls were imposed in March after Cyprus agreed with other Eurozone countries and the IMF on the rescue plan that forced uninsured depositors to take massive losses on their savings in Bank of Cyprus, the country’s largest, and the now-defunct Laiki. Bank of Cyprus absorbed parts of the smaller lender.

Cypriot authorities have already put together a “road map” of banking sector milestones that must be achieved before the controls are fully phased out. The government hopes to remove almost all controls by early next year although when they were set in place it was said they would last only a few weeks.

The four-person commission says there are “sound reasons” for Cyprus to keep a large banking sector over the longer term, primarily because there are no other sources of finance in the country.

Bank of Cyprus shares will remain suspended until Jan. 31, 2014 Cyprus’s stock exchange said, after its shareholder structure was revamped by imposing losses on depositors.

All that came as envoys from the Troika began a second inspection visit assess progress in economic restructuring and were to concentrate on reviewing reforms in the island’s banking sector.

The Troika, as the lenders are known, would also look at privatizations of state-controlled enterprises which the three-year program says could generate a cash boon of 1.4 billion euros (1.2 billion pounds) for the country.

In its first review held over the summer, lenders said Cyprus had made progress with overhauling its banking sector and pushing through structural reforms.

“I’m certain that the second assessment will be as favorable as the first as to the manner in which we are dealing with the hardships and our obligations,” said Cypriot President Nicos Anastasiades. He campaigned against the bank seizure plan earlier this year but accepted it as soon as he took office but then tried and failed to get it revamped. The Troika mission plans to be in Cyprus until Nov 8.

Cyprus has so far absorbed 47 percent of its 10-billion-euro aid package. Part of it was used to prop up cooperatives, dozens of small savings banks which are to be merged and revamped by early next year.

Cypriot officials said troika representatives would be informed of a restructuring program for Bank of Cyprus, owned by the depositors whose savings were converted to equity to save the bank.

Bank executives declined to comment on what the restructure entailed or on speculation it meant splitting Bank of Cyprus into two, to buffer it from rising non-performing loans.

The bank reported record losses of 2.3 billion euros for 2012 on a surge in non-performing loans as a crippling recession impacted people’s ability to repay debts.

John Hourican, a former RBS senior executive appointed CEO of Bank of Cyprus last week, said the issue of non-performing loans was among the most pressing issues at the bank.

“This is an unprecedented situation that has happened to Cyprus and to the Bank of Cyprus and I think that, while the problems are actually quite clear, the solutions are as of yet untested, and not clear to me given that I haven’t yet taken full possession of the job,” Hourican told journalists after meeting Anastasiades. He assumes his duties on Nov. 4.