Cyprus Prosecutes Bank Failures

Nearly a year after asking for an international bailout with its economy on the edge of collapse, Cyprus will start going after the people who caused it, after state banks made risky loans to Greek businesses and built a big portfolio of Greek bonds that were devalued 74 percent.

The decisions brought the banks 4.5 billion euros ($6.16 billion) in losses and pushed the government into taking a 10 billion euro ($13.7 billion) rescue package that required the confiscation of 47.5 percent of bank accounts over 100,000 euros ($137,000) to prevent the institutions and country from going broke.

Attorney General Costas Clerides said authorities would be working with experts from abroad in building cases, but declined to go into more details. “Cases which are ready, or almost ready, will be referred to court in coming weeks,” Clerides said, according to Reuters.

Cyprus was forced to shut one major lender, Laiki Bank, which along with the Bank of Cyprus, chalked up massive losses from an EU-sanctioned writedown of Greek sovereign debt, forcing an already cash-starved state to buckle and seek emergency aid from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB).

One report compiled by Central Bank consultants said that the former management of Bank of Cyprus ploughed millions into risky, high-yielding Greek debt to offset an erosion of its balance sheet from rising non-performing loans.

The report also highlighted deletions of data at the bank which delayed their probe in an apparent attempt to cover up wrongdoing.

Banks in recession-hit Cyprus, reeling from a financial crisis, are struggling with non-performing loans that make up nearly half their lending and are hampering efforts to finance a cash-starved economy.

The central bank says banks’ liquidity is sufficient to absorb NPLs up to a certain point, but fast action is needed as the figure is rising, according to Agence France Presse.

So government, lenders and borrowers are seeking ways to reverse the trend without further damaging an economy forecast to contract by 8.7 percent in 2013 and another 3.9 percent this year.

The total of NPLs — defined as loans more than three months in arrears or rescheduled several times — was 23 billion euros ($31 billion) at the end of September, according to the latest central bank figures.

That is well in excess of GDP that stands at only 17 billion euros, and represents 42.3 percent of total lending. Fiona Mullen, a director at research consultancy Sapienta Economics, told AFP they could soon reach 50 percent, before stabilizing later this year.