The Financial Crisis Of Cyprus

The Financial Crisis Of Cyprus

/ BBP Law School
LLM International Business Law September 2014

/ Michalis Anastasiou

 

Introduction

In the recent years the financial crisis that has been spread around Europe has raised high on the political and legal agenda. The crisis began from the USA in 2007 and since then it has managed to occupy more and more countries in Europe including Cyprus. The crisis in Cyprus has got a lot of attention due to the harsh measures the European Central Bank (ECB) has used to rescue the island from not collapsing its financial sector. The dissertation is aimed to identify the reasons that lead the island to its situation and ECB’s aggressive manner against it.

This dissertation is divided into four complementary chapters. The first chapter traces the background of the economy in Cyprus over the last decade; more specifically it represents Cyprus’ adoption of the Euro and how it affected it. Following, the Russian money that have been invested for years in the island will be discussed mainly because there are accusations that Cyprus is a money laundering jurisdiction. An analysis will then take place on the bad governance of the island’s two largest banks the Bank of Cyprus and the Cyprus Popular bank during the last years. Finally, there will be a discussion on the merging of Cyprus Popular Bank with a Greek Bank full of liabilities and Central Bank of Cyprus’ incompetence as the island’s main banking authority for approving it.

The second chapter consists of an analysis on the collapse of Cyprus banking sector and the inability of its government to intervene effectively. The responsibility lies to the Governor of the Central Bank of Cyprus(CBC) and the former President of Cyprus whose actions have proved that they were incapable of full filing the obligations of their positions, and lead Cyprus into catastrophe. In addition, a discussion is made on ECB’s poor supervision over CBC.

The third chapter focuses on the bail-in deal that ECB proposed on March 2013 for “rescuing” Cyprus’ financial sector. The bail-in rescue measure was used for the first time as previously

4 of 37 SRN: 1053148 Greece, Iceland and Portugal were rescued through a bail-out measure. The bail-in measure took

a lot of attention among the EU countries as it was regarded as bank robbery.

Finally, an extensive analysis will be made in chapter four questioning the validity of the bail-in measure, the further measures that ECB has proposed and the legal claims that citizens are trying to raise after the deal of March 2013.

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Chapter 1: The background over the last decade in Cyprus’ economy

1. Cyprus becomes part of the Eurozone

During the early 2000s when Cyprus’ economy grew at a rate well above the EU average, the island’s Government began negotiations in order to become a member in the eurozone and adopt the unification under the euro. It should be noted that during that time Cyprus’ currency was the Cyprus pound which was considered much stronger against the euro. The basis of these negotiations was that trading with other Eurozone members would become easier and to disparate exchange rates between European nations. Cyprus joined firstly the EU in 2004 and the government believed that becoming member of the Eurozone would help the island to develop economically as its trading would possibly become higher. “Integration in a market without internal borders became the new reality faced by Cyprus’s markets for products, services, labour and capital”1. Finally, Cyprus adopted the euro as its national currency in January 20082 believing that this would harmonise its liquify regime with that of Greece and face the competition of the Greek Banks in general but mainly in constructions and real estate.3

However, as time passed it became clear that the unification under the euro affected each nation differently based on the size of their economies and what currency they had before. During the global financial crisis in 2009 big economy countries such as Germany and Italy got affected less than countries like Cyprus, which makes up just 0.2% of a broader eurozone economy of €10

1Athanasios Orphanides, George Syrichas (2012), “The Cyprus Economy – Historical Review, Prospects, Challenges” p28

2Euro Challenge (2012), “An overview of Cyprus’ Economy”

3Marios Clerides and Constantinos Stephanou (2009), “ The Financial Crisis and the Banking System in Cyprus” p39

6 of 37 SRN: 1053148 trillion. The key difference to other eurozone countries was the fact that the island had deposits of

€70 billion euros compared to a gross national product of around €18 billion which overinflated the banking sector. The sense of security inspired by EU membership, alongside with the unification under the euro that would stablished favourable conditions for long-term economic stability was proven differently. “Euro deposits by non-residents which until then were considered to be foreign currency and subject to high liquidity requirements by the Central Bank of Cyprus (CBC) were then classified as local currency and, hence, subject to much lower liquidity requirements of 25% that applied to local resident deposits.”4 This caused the banks to have a credit expansion together with the lower of the ‘euro’ liquidity ratio to 20% in 2008.5

Anyone who has been in Cyprus the the last 6 years, understands that the eurozone, which is not just a market economy but a currency union with strict rules, is not compatible with a communist government. Arguably when in 2008 the Cypriot public elected as president a communist, Mr Demetris Christofias, that government took a country with excellent economic health and a surplus in fiscal accounts. The same government started overspending, not only for unproductive government expenditures but also they raised implicit liabilities by raising pension promises, and so forth.6 The EU security started to disappear and Cyprus’ downhill began.

2. Russian money in Cyprus and the money laundering link

Cyprus has an English-based law system of regulation and implemented the main EU and international regulations on banking and money laundering and many double taxation bilateral agreements.7 The island’s banking system is an offshore financial centre with low tax and high

4Marios Clerides, op. cit., p38 5 ibid.

6The Economist. What happened in Cyprus. Available from, http://www.economist.com/blogs/

freeexchange/2013/03/interview-athanasios-orphanides [accessed 15th Jul 2014]

7Sustainable Governance Indicators. Rule of Law. Available from, http://www.sgi-network.org/2014/

Democracy/Quality_of_Democracy/Rule_of_Law/Legal_Certainty [accessed 15th Jul 2014

7 of 37 SRN: 1053148 rates.8 Due to the collapse of Beirut as a financial centre in the early 1980s, the island’s

geographical position and good banking system has helped it with the growth of its finance and offshore sector as a number of its neighbours were attracted with it. The accession to the EU in 2004 was the beginning of a tax haven as the islands government managed to preserve a competitive tax regime of 10% for international companies which allowed it to compete other EU tax havens such as Liechtenstein, Gibraltar, Luxembourg and the British Isles.9 According to the Russian State Statistical Agency, ROSSTAT, by the end of 2011 Cyprus was placed to be the second largest destination for Russian outward foreign investments.10 In addition to that, Moody’s credit agency ratings estimated that within the Cypriot bank accounts there are £18.7 billion of Russian money. 11 This huge financial relationship between Cyprus and Russian has taken some attention and a number of EU countries have began attacking the island for money laundering.

In a paper at VOX EU that was published in June 2013 concerning offshore jurisdictions, money laundering and the collapse of Cyprus banking system, Cyprus was attacked that the dominance of Russian money within the island are evidence for ‘round tripping’; “ the transfer of funds abroad in order to bring some or all the investment back as foreign investment”12. Researcher Sveltana Ledyaeva stated within her paper about offshore jurisdictions, that the round-tripping between Cyprus and Russia is corruption linked with money laundering.13 She argues that proceeds for corruption may be laundered in jurisdictions which uphold very strict bank-secretary laws, meaning an offshore financial centre like Cyprus.14 In addition, within the paper at VOX EU there is a study

8Ledyaeva S, P Karhunen and J Whalley (2013), “Offshore jurisdictions (including Cyprus), corruption money laundering and Russian round-trip investment”, NBER Working Paper 19019.

9Nicos Trimikliniotis (2013), “ The Cyprus Eurocrisi: the beginning of the end of the Eurozone?”

10VOX. Cyprus, corruption, money laundering and Russian round-trip investment. Available from,

http://www.voxeu.org/article/russian-cyprus-round-tripping-corruption-linked-money-laundering [accessed 17th Jul 2014]

11Young, E (2013) “Russian money in Cyprus: Why is there so much?” BBC News, 18 March 2013. 12VOX, op. cit.
13Ledyaeva S, op. cit.
14ibid.

8 of 37 SRN: 1053148 with empirical evidence and ROSSTAT calculations which support the argument of corruption,

money laundering and Russian round-trip investment via Cyprus.15

On the other hand, all these are arguments and statical evidence. There are no clear evidence to prove that Cyprus is a money laundering home but there are perfectly legitimate reasons for a Russian company to set up in Cyprus. First of all, the 10% corporate tax rate16 and the fact that there is a tax treaty between Russia and Cyprus where a firm will not be taxed in both places.17 Furthermore, why would a Russian company want to invest in a region that some argue corrupt? A foreign investor would want to invest in a place where its money will be under the protection of the local laws. In other words, an offshore sector with a valid legal system is the perfect place for a Russian investor, meaning Cyprus. Cyprus, even before joining the EU in 2004 had implemented laws concerning the prevention and suppression of money laundering, and also placed a body responsible for the supervision of these matters.18 The Prevention and Suppression of Money Laundering Activities Law was amended in 2007 with the purpose “to define and criminalise the laundering of the proceeds generated from all serious criminal offences or terrorist financing activities, and provides for the confiscation of such proceeds aiming at depriving criminals from the profits of their crimes”19. According to a paper published in June 2014 from lawyer Loucas Haviaras of the Haviaras & Philipou L.L.C, he shows that the adoption of the 2007 Law has put Cyprus in line with a number of international conventions relating to money laundering and financing terrorism.20 The 2007 Law has been amended another four times up until 2013 which

15VOX, op. cit.
16The Income Tax Law 2002, No 118(I)/2002
17Cyprus – Russia Tax Treaties, Agreement of 5th December 1998 18Prevention and Suppression of Money Laundering Activities Law 2001 19Prevention and Suppression of Money Laundering Activities Law of 2007

20Loucas Haviaras (June 2014), “Cyprus: Cyprus Anti-Money Laundering Measures And the New Regulations for the Administrative Service Providers (ASP)”, Haviaras & Philippou L.L.C

9 of 37 SRN: 1053148 shows Cyprus’ continuing concern on the matter.21 In addition, Mr Haviaras states that according to

two reports from Deloitte and Moneyval concerning the review of the anti-money laundering procedures in the Cyprus’ banks, it was shown that Cyprus does not give the right to any EU country to attack it as a money laundering jurisdiction.22

In contrast, there are a number of examples of proved money laundering incidents outside Cyprus during the last six years;

  • “In 2013, Guaranty Trust Bank (UK) has been fined with a fine of £525,000 for inadequate anti-money laundering control in relation to high-risk customer, politically exposed.
  • In 2012, HSBC Holdings Plc agreed to pay $1.92 billion in fines to U.S. authorities for not applying the anti-money laundering provision, allowing the institution to be used by Mexican druglords for money laundering.
  • In 2008, Commerzbank was ordered by the Frankfurt civil-court to pay €7.3 million, includingconfiscation of €6.3 million of profits derived from illegal activity.”23
    During the high tense months in 2013 on Cyprus’ economy, a number of investors started to have concerns whether to keep their money in the Cypriot offshore. Some businessmen started to consider Luxembourg as the place to keep their money and it should be noted that Luxembourg is also a Russian investment base. According to an article in the Russian Pradva website “Luxembourg has invested 28 billion euros in Russian projects”24 during the last four years. I now raise the question as to why did not any EU country attack Luxembourgs’ financial relationship with the Russians?

3. The loans given by the Cypriot Banks

21Central Bank of Cyprus. The Prevention and Suppression of Money Laundering Activities Law of

2007 to 2013. Available from, http://www.centralbank.gov.cy/nqcontent.cfm?a_id=11526 [accessed 20 Jul 2014]

22Loucas Haviaras, op. cit. 23ibid.

24Sergel Vasilenko (2013), “Russian business to turn to Luxembourg instead of Cyprus?”, Pravda.Ru

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As a lot of money were invested in Cyprus the bloated sector became very powerful. Cypriot banks took easily high risks for huge returns and offered to depositors really good rates of interest as high as 4.75% for long-term accounts, so the banks could expand their business into Greece,Russia and Ukraine.25

Because of this high interest, a big amount of money was controlled by the Banks of Cyprus in compare to how small the island is. Businesses and individuals were asking for loans and, Cyprus Popular Bank(CPB) and the Bank of Cyprus(BoC) would give them easily without obtaining the relevant guarantees from the borrowers as there were a lot of money in their capitals. The fact that the loans were given to borrowers very easily shows that the relevant processes or governance did not take place properly and as a result most of the loans have never been repaid while both banks had to pay their depositors. This caused the banks to be in big dept as they were not making enough money to make their interest payments.

In addition to the above, from 2004 and onwards Cyprus had a huge property development. A number of local and foreign developers made huge investments within their field as the above banks were giving loans easily and constructions/properties were increasing along the island. The loans that were given during 2006-2008 to the construction and real estate sectors increased from 9.8% to 16.3%.26 Local and foreign investors were buying rapidly as future investments but the 2008 crisis left a big number of those who bought the relevant properties exposed, as mainly English and German people who invested in, did not have anymore the money to pay the mortgages of the properties. The fact that house prices increased by almost 50% until the end of the 2008 played its role too.27 Further to this, the developers were left exposed too as by not receiving the relevant money they then could not repay the loans they borrowed. In a recent list

25Paddy Hirsch (2013), “What just happened in Cyprus?”, Marketplace 26Marios Clerides, op. cit., p40
27ibid., p41

11 of 37 SRN: 1053148 that was published concerning the big debtors within the CPB and BoC, it was showed that

developers owe to the banks over €6 billion in loans while Cyprus had a €10 billion bailout agreement in March 2013.28 In 2007, Cyprus’ banking authority Central Bank of Cyprus(CBC) introduced tougher lending restrictions for housing loans however the crisis had already hit globally and the mistakes in the island were already made. CBC has been attacked from the public due to its poor supervision over the two banks while the two banks have been attacked because of their poor governance and policy.

The Cyprus Banking Governance Code(the Code) has the same characteristics UK Banking Governance Code. Both Codes provide a comprehensive set of principles for the banks to achieve good corporate governance. Their principles consider leadership, effectiveness, accountability, remuneration and relations with shareholders.29 A bank must have a responsible and effective board of directors with the relevant skills, and there must be within the policy of the bank a proper risk management process to achieve the bank’s objectives.30 As in the UK, the Code in Cyprus is not a compulsory one but it should be complied by the relevant institutions within its lines and the CBC supervises the degree of compliance by receiving annual reports from the banks. Taking into account the above, BoC and CPB have not proven any effectiveness with their actions nor they were accountable as no risk management was achieved. There has been a serious violation of the Code’s guidelines and CBC the responsible authority of supervising the Code’s compliance has not achieved its role either.

4. Cyprus Popular Bank(CPB) merges with Greek banks Marfin Bank and Egnatia Bank

When in 2006 the Greek Marfin Investment Group acquired HSBC’s shares in Cyprus Popular Bank no one knew what this would cause to CPB and Cyprus. Marfin Investment Group then

28George Psyllides, “Developers: irregulars banking system to blame fro NPLs”, Available from Cyprus-Mail [accessed 20 Jul 2014]

29Corporate Governance Code 3r Edition September 2009, Cyprus Stock Exchange 30ibid.

12 of 3 7 SRN: 1053148 acquired more shares and subsequently CPB was merged with smaller Greek banks Marfin Bank

and Egnatia Bank to form Marfin Popular Bank(MPB).31 The structure of the Group was such that Marfin Egnatia Bank would be located in Greece as subsidiary which with 95% owed to MPB and MPB would be located in Cyprus as the parent company.32 MEB was regarded as a separate legal entity from MPB.

In 2009 the Board of Directors of MPB decided to turn MEB into a branch of MPB while keeping the main company under Cyprus’ regulatory supervision, the Central Bank of Cyprus(CBC). The merge was completed in March 2011 after the decision of the District Court of Nicosia approved the competition of the cross-border merger of the MEB and MPB according to the EU Directive 2005/5633 on cross border mergers.34 The consequences of the merge was that any liabilities of the branch would be transferred to Cyprus as under section 201I-X of Cyprus Companies Law, the branch that was created in Greece was now operating under the parent’s banking licence, CBC’s licence.35

Even before the competition of the merge, MEB was considered one of the worst performing Greek banks as by 2012 over 40.1% of its Greek loan book was non-performing.36 As a result on July 2012, the Cypriot Government gave €1.8 billion bail out to the MPB Group in order to recapitalise the bank’s losses due to MEB’s liabilities on its holding of Greek Bonds.37 This point is regarded vital on Cyprus’ today economic situation.

31 Maria Korologou (2013), “The 112-year History of Laiki Bank”

32 Alvarez & Marsal Global Forensic and Dispute Services, LLP, (2013) “Investigation Report, Bank of Cyprus- Marfin Popular Bank Group- Review of Cross-border merger”, para 3.1.2

33Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies

34 Alvarez, op. cit., para 3.1.11
35 ibid., para 5.1.2
36A. Antoniou, “Λαϊκή: Καταστροφή εξ Ελλάδος” Inbusiness (2013) 15th April 37 Alvarez, op. cit., para 3.1.13

13 of 3 7 SRN: 1053148 A number of questions have been raised as to why the CBC Governor approved such merge as

CBC was the responsible body with discretionary powers to approve or revoke it. According to sections 7 and 10 of Cyprus Law 66(I)/19997 on Banking Activities, in order for a bank to convert a subsidiary into a branch the CBC must be informed about it with the relevant details and after the details have been examined explicitly then a decision is provided to the applicant bank.38 The questions were mainly raised as prior the conversion, CBC had within its knowledge the potential liabilities of MEB of €1.3 billion of outstanding loans and its Board showed bad governance. CBC has failed again to follow the Banking Governance Code.

38 Alvarez, op. cit., para 5.2.2

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Chapter 2: The collapse of the banking and financial sector, and the inability of the Government to control and intervene

1. Central Bank of Cyprus’ responsibility in regards to the merge of Cyprus Popular Bank with Marfin Bank and Egnatia Bank

Central Bank of Cyprus is regarded as an independent organ from Cyprus’ Government and fulfils its obligations as the Main Banking Authority according to its articles of association without any serious supervision. However the Governor of the CBC is appointed by the President of Cyprus for a renewable five-year term. The Governor’s role is as the chief executive organ for the proper application of CBC’s policy. It is submitted that the President has to choose a competent and responsible person to be the Governor of CBC as the main role of the Bank is to safeguard the stability of the island’s financial system through the proper supervision of the other banks’ actions and by acting as lender of last resort if it is required.39

As mentioned before the responsible authority in Cyprus for approval to establish a branch in a member-state is the CBC. According to Cyprus Law 66(I)/1997 on Banking Activities once the CBC gets all the relevant details concerning any conversion it then has three months to communicate with the authority of the host nation whether it approves or refuses the conversion. In other words, the law provides plenty of time to mitigate or identify any risks and it also gives discretionary powers to approve or refuse such conversion. In addition, section 30 of the above law provides that CBC has the power to impose new conditions within the conversion and to set limits in respect to a bank’s activities in order to safeguard the interest of the depositors or creditors.40 Can CBC considered as an authority that fulfilled its powers as the Main Banking Authority?

39Central Bank of Cyprus. Financial Stability – The Bank’s Role. Available from, http://

www.centralbank.gov.cy/nqcontent.cfm?a_id=8130 [accessed 21 Jul 2014]

40 Alvarez, op. cit., para 5.2.6

15 of 3 7 SRN: 1053148 The conversion made MEB to be a branch of MPM and according to company law, any losses and

liabilities of the branch are obligations of the parent company, so any Greek Liabilities have been transferred to Cyprus banking sector. As it was noted before, CBC had knowledge about MEP’s liabilities from March 2009 even before approving the conversion and subsequently transferring them all in Cyprus. In detail MEB’s loan portfolio had €1.3 billion of outstanding loan, loan were granted on favourable terms and an insufficient collateral was held against loans.41 In addition to that, in 2011 the Bank of Greece(BOG) informed CBC about its concerns on MEB’s concentration and credit risk policies.42 The next step was the Cypriot Government giving a €1.8 billion bail out to MPB so it could be recapitalise due to the losses of MEB’s activities in Greece and bad investments of the Bank in Greek Governmental Bonds that will discussed in the next section of this chapter.

The Government of Cyprus clearly did not make the right decision on choosing the CBC Governor Athanasios Orphanides in 2007 as according to his actions he has not full-filed his obligations at all and he was proven incapable for the position. The governance within CBC does not go with the lines of the Code as the process for approving the conversion of MEB to a branch was not rationale. If MEB’s liabilities have been taken into account more analytically the conversion would have never been approved and Cyprus could have avoided the bail out which has cost the island a lot.

2. Bank of Cyprus(BoC) and Marfin Popular Bank(MPB) bought Greek Governmental

Bonds(GGBs)

According to a report from European Regulators, by the end of 2010 BoC and MPB had a combined €5.8 billion of GGBs.43 During 2010 German and French leaders had been advising

41 Alvarez, op. cit., para 6.3.1 42 Alvarez, op. cit., para 2.1.4

43Michel Kambas, Stephen Grey and Stelios Orphanides, (April 2013) “Insight: Why did Cypriot banks keep buying Greek bonds?”, Available from Reuters [accessed Jul 21 2014]

16 of 3 7 SRN: 1053148 openly that creditors of weak economically countries as Greece would get affected due to losses

on future bailouts. In 2011, the European Leaders agreed for a Greek Bailout that included losses on GGBs. As a result the two Cypriot Banks were left with lower capital levels than what was required. Demetris Syllouris the Head of Cyprus parliament’s ethics committee stated in a press conference; “They should have bought from different governments rather than just Greece”.44 This shows how the bad governance within the two banks lead to bad decisions which brought bad results.

Alvarez & Marsal Global forensic and dispute services(A&M) was instructed in August 2012 from the Central Bank of Cyprus(CBC) to investigate BoCs’ holding of GGBs as there was no apparent rationale in investing in GGBs. According to their report by the end of 2010, BoC had €2.4 billion of GGBs however BoC’s disclosed documents did not provide any clear reasoning as to why the investment took place. Through my examination of A&M report the only point that could be identified as a rationale of the GGBs investment was that it was made for the individual benefit of some managers under the bonus structure policy of the bank. According to the BoC’s internal policy, Mr Andreas Eliades the Chief Executive Officer of the Bank until 10 July 2010, and Mr Yiannis Kypri the Chief General Manager of the Bank would get a reduction of their bonus if the Bank had underperformance.45 So by investing into GGBs in a lower price this meant that the Bank was in performance but this resulted to a big damage for the Bank as the GGSs were proven in the future to worth nothing. Mr Eliades and Mr Kypris pressured the investment of GGBs in order to get their bonuses without considering the future potential losses of the Bank. A number of questions have been raised as to who made the decision to invest in GGBs and A&M report have provided some important elements on the matter. Firstly according to the A&M report, Group ALCO, the committee responsible for the Bank’s risk management made the decision to invest in the GGBs.46 Mr Nicolas Karydas the General Manager of Risk Management and Markets of the Bank admitted

44Michele Kambas, op. cit.
45 Alvarez & Marsal Global Forensic and Disputes Services, LLP, (March 2013), “Investigation

Report, Bank of Cyprus – Holdings of Greek Government Bonds”, para 2.3.2.3 46 ibid., para 2.4.1.1

17 of 3 7 SRN: 1053148 in an interview that the risk management procedures of BoC showed an inability to adequately

consider the risks that were linked with the investments in GGBs as it did not recognise that default in Greece was a future possibility and no mitigating actions were made but only aggravating.47 It should be noted that 28,000 files with data of BoC’s transactions between 2009 and 2010 were erased within minutes when A&M requested them from BoC.48 No clear reasoning was given about the erase but suspicions were created about the investments. Furthermore, CBC’s supervision within the investment of GGBs is vital as according to A&M report, CBC was not aware of BoC’s investments between December 2009 and March 2010. CBC requested a detailed report of BoC’s sovereign bond holdings in March 2010 but it never got any response. CBC subsequently did nothing about that and it did not follow its supervisory role as the main authority of Cyprus Banking System. The reasons of CBC’s actions are unclear and no explanations have been given. If CBC had pressured BoC to get the relevant reports and monitored properly BoC’s investments, the bad investment would have been avoided and the Bank would not have had the losses of €1.9 billion that were calculated by the end of 2012. In addition, within CBC’s role is to supervise the risk governance structure of the Cypriot Banks which in BoC’s case was clearly poor and CBC’s Governor Mr Orphanides was proven again incapable to cover the relevant position.

About MPB’s investments, by the end of 2010 MPB holdings of GGBs were calculated to be worth €3.3 billion. On MPBs case no accurate rationale was provided either about the investment but concerns had been raised as to why CBC did not request an investigation from A&M on MPB’s actions. MPBs chief risk officer Mr Spanodimos stated in August 2010 that the bank was expanding faster than rivals in Greece. The expansion was made via risky investments where the Bank was buying Greek Government Debt and extending huge amounts of mortgage loans in Greece and Cyprus. While everyone in Europe was leading away from the Greek economy Mr Spanodimos was purging towards it and with the 2011 Greek Bailout, MPB suffered losses on Greek government debt of €2.4 billion. As mentioned before, the 2011 losses and MPB’s bad governance

47 ibid., para 2.5.1 48Michele Kambas, op. cit.

18 of 3 7 SRN: 1053148 lead the State of Cyprus in providing €1.8 billion to recapitalise MPB in May 2012 after the advice

of 2012 new CBC Governor Mr Panicos Demetriades.49 Mr Panicos Demetriades appointment as CBC Governor lead towards Cyprus catastrophe as he has put Cyprus from May 2012 up to the end of that year in huge debt. The next section of this chapter identifies the reasoning of the attack over Mr Demetriades.

Main Principles of the Code that were discussed before were not followed by all three bank nor the bank-customer legal relationship was taken into account. The primary relationship between a banker and a customer is based on contract.50 The contract between the banker and the customer is an unwritten one and its terms are implied.51 The general view is that banker – customer relationship is best explained as debtor – creditor relationship. Accordingly a banker has the right to use the money of a customer for its own purpose but the money should be repaid on an equal amount when asked. Both banks have been investing on GGBs but were they then in position to repay their customers when asked? Due to the bad management from the banks, big debts resulted by which a bad deal with European Central Bank came into effect in March 2013. The deal lead both banks to be unable to repay their customers money. Furthermore, within the duty of care of a bank to its customer it is to hold and manage the customer’s asset for the the customer’s benefit. These actions must be made by the bank under reasonable skill and care. It is submitted that both Banks’ investments were clearly made without any rationale and breached their relevant duties to their customers.

3. The ELA for Marfin Popular Bank(MPB)

“ELA (emergency liquidity assistance) means the provision of central bank money and/or any other assistance that may lead to an increase in central bank money to a solvent financial institution, or

49Angelos Anastasiou (Jan 2014), “ ECB points fingers at CBC over Laiki’s ELA”, Available from Cyprus-Mail [accessed Jul 23 2014]

50Royal Petroleum Co. Ltd v. First Bank of Nigeria Ltd, (1997) 6 N.W.L.R pt.510 pg584 51 Allied Bank (Nig.)Limited v. Akubueze(1997) 6 N.W.L.R. (Pt. 509) 374

19 of 3 7 SRN: 1053148 group that is facing temporally liquidity problems, without such operation being part of the single

monetary policy. Responsibility for the provision of ELA lies with the national central banks.”52

Due to the losses that MPB suffered because of the 2011 Greek Bailout and the general bad governance within the Bank by the end of 2012, MPB had received €11.4 billion in ELA and state funds. The CBC Governor of that year Mr Demetriades has been accused for the measures he took for seeking ELA from the European Central Bank(ECB). According to the President of ECB Mr Mario Draghi, CBC was the responsible authority to identify whether MPB was in position to receive the ELA and then repay it. It is as a rule in the Eurosystem that in order for a national authority to seek the ELA provision it must be satisfied that the relevant financial institution is solvent and creditworthy against adequate collateral53, and it must inform the ECB with the details of the operation.54

An investigating committee was set up after March 2013 to examine the causes of Cyprus’ economic crisis and the ELA provision. According to the committee’s advisor, Professor Stavros Zeniou of the University of Cyprus, the conclusions within the investigation were that MPB was insolvent when it received the state support in May 2012 and that the Bank was never in position to repay the ELA that it was receiving from before and afterwards.55 Mr Spyros Stavrinakis, the CBC director who was responsible for the ELA provision admitted before the investigative committee that MPB was insolvent when it was receiving the ELA but he responded in his defence that the CBC board of directors believed that MPB could become solvent with the ELA.56 This point shows a clear violation of the EU rules in the ECB policy in providing ELA as MPB was insolvent and

52European Central Bank, Eurosystem, “ELA PROCEDURES”, Available from ECB Europa [accessed Jul 24 2014]

53George Christou, “The case against the governor”, Available from Cyprus-Mail [accessed Jul 24 2014]

54European Central Bank, op. cit. 55George Christou, op. cit. 56George Christou, op. cit.

20 of 3 7 SRN: 1053148 therefore ineligible for liquidity assistance. In addition to the above that MPB was never in position

to repay the ELA, it should be noted that due to the fact that MPB was exposed within the Greek economy, the ELA was never meant to be used fully for the financial stability of Cyprus banking system but it was also used to assist Greece’s financial stability because of MPB’s responsibility on Greek liabilities. Instead of giving assistance to MPB and Cyprus’ economy, CBC’s actions created a condition into Cyprus’ economy as the ELA has cost the island €9.5 billion, an amount that accounts for about 60% of the island’s Gross Domestic Product(GDP).57

Professor Zeniou also stated that through his examination of the relevant data of CBC about the ELA, the only rationale action that CBC should have done was to place MPB under resolution from May 2012 as it was a very unhealthy bank and close bankruptcy.58 MPB’s board of directors have their part within these bad decisions. As the UK Insolvency Act 1986 does, the Cyprus Insolvency Law also provides schemes of arrangement to companies that are unable to repay their debts. In the case of MPB, liquidation was the action that the Bank’s Board had to follow. In accordance with section 211 of Cyprus Insolvency Law, a company may be liquidated by the court if it is unable to pay its debts after a creditors has filed an insolvency petition. MPB’s Board of Directors were in breach of their disclosing requirements to their creditors and a petition could have never been filed.59 Furthermore, according to section 261 of Cyprus Insolvency Law, a company may be wound up voluntarily by its members “if the company resolves by extraordinary resolution to the effect that it cannot by reason of its liabilities continue its business, and that it is advisable to wind up.”60 MPB could have been shut down earlier by its own Board as according to the aforementioned relevant data, the Bank was in big debt.

57Central Banking Journal. ECB conflicted by Cyprus bail-in. Available from, http://

www.centralbanking.com/central-banking-journal/feature/2287549/ecb-conflicted-by-cyprus-bailin [accessed Jul 24 2014]

58George Christou, op. cit.
59Part 15, Chapter 5, Companies Act 2006
60Companies Law 2012, Chapter 113 of the Cyprus Laws sections 203-344

21 of 3 7 SRN: 1053148 A number of questions from the public have been made in regards to MPB’s and CBC’s irrational

actions. It is submitted that the Government of Cyprus with President Christofias was giving orders to Mr Demetriades to continue the pouring of billions into MPB. President Christofias wanted to hide the fact that under his leadership one of the biggest banks of Cyprus has become insolvent as it could damage the image of his party AKEL on the forthcoming presidential elections in February 2013. If Governor of CBC Mr Demetriades had requested an investigation from Alvarez&Marsal on MPB in 2012 as he did for the Bank of Cyprus, A&M would have identified that MPB was not healthy and it would have suggested the Bank’s closure for Cyprus’ overall financial stability rather than requesting ELA which has cost a lot. Mr Demetriades actions demonstrate his failure of effective prudential regulation and supervision of the island’s banking system.

It is also submitted that even though the ECB is accusing CBC as to how it was using the ELA provision and that other measures had to be taken instead, there are rumours among politicians that ECB wanted to assist Greece through Cyprus so that Greek economy could become stable and no future bail in would take place on depositors of MPB in Greece. In my opinion ECB did not want to destroy what it has built in Greece from 2012 so it tried to keep Cyprus’ condition in the island. There are no real evidence to prove this but the speculations have a point as ECB is the responsible authority of the national central banks among the EU countries and the fact that it have done nothing about the situation raises questions. According to Article 14.14 of the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB), the ECB can stop ELA operations if it considers that these operations interfere with the objectives and tasks of the Eurosystem and the decision is subject to a two-thirds majority vote within ECB Governing Council.61 One of ECB’s multiple objectives is to maintain the safety of the European Banking system through the proper supervision over the central national banks.62 ECB has not fulfilled its supervisory obligations as CBC was acting against the objectives of the Eurosystem and the ELA operations were unstoppable.

61European Central Bank, op. cit. 62European Central Bank, op. cit.

22 of 3 7 SRN: 1053148 4. The Mari Naval Base Incident

On July 11 2011 a tragic national event occurred in Cyprus, when 98 containers full of confiscated explosives exploded at the Mari Naval Base where 13 people were killed, the base and the nearby power plant Vasilikos were destroyed. The containers were exposed for two and a half year in the sun on the Mari Naval Base after they had been seized by the US Navy in 2009 after it intercespted a Cypriot-flagged, Russian owned vessel, the MV Monchegorsk, travelling from Iran to Syria in the Red Sea. The Cyprus Navy was given responsibility for the explosives from the United Nations and it moved them to Mari Naval Base.

The story behind the storage of the containers is sad and shows the incompetence of the Government of Cyprus. The Cypriot Government declined offers from the United Kingdom, Germany and the United States to remove the containers because it did not want to create tense with Syria. The non-removal of the explosives was clearly of political reasons. President of Cyprus Mr Christofias gave personal assurance to Syrian President Bashar al-Assad that the explosives would not be destroyed nor leave Cyprus but that they would be returned to Iran and Syria.63

The explosion destroyed the largest electricity generation of the island, Vasilikos, which cost to the government €1.5 billion to be build and covers 60% of Cyprus’ supply.64 As a result of its damage, electricity and water supply cuts began around the island, and a decline within the market started. In addition, Greece sent mobile generator to help Cyprus with the power shortage as the repairs of the damage would take months to be completed. The mobile generators operated by the Electric Authority of Cyprus(EAK) cost €49 million for one year only.65 The University of Cyprus released an estimation in April 2012 that the explosion cost to Cyprus’ economy a 2.4% reduction in Gross

63”Power Generation in the post-Mari era”, Sunday Mail Newspaper, Sunday 22nd April 2012 64”Cyprus faces energy crisis after deadly blast”, Kathimerini Newspaper, Tuesday 12th July 2011

65News, “EAC solar blitz with 20MW park in Limassol”, Available from Financial Mirror [accessed on Jul 26 2014]

23 of 3 7 SRN: 1053148 Domestic Product(GDP) on an annual basis, which amounts to €500 million.66 According to the

Finance Ministry, in 2012 it calculated that Cyprus will sustain losses of about €1 billion because of the continuing repairs and the backwards route that the market of Cyprus took.

Who was responsible for not removing the explosives? The President of Cyprus has been blamed for negligence as he failed to make a proper decision-making process to protect the Cypriot citizens even though there were concerns among politics and public about the storage of an atomic bomb in the island. The Government was once again proven incompetent for the island’s standards and President Christofias for unknown personal reasons lead Cyprus to another disaster which caused the island emotionally and economically.

66Power Generation, op. cit.

24 of 3 7 SRN: 1053148

Chapter 3: The deal of March 2013; a bail-in

Since the financial crisis that began in 2007 in the USA, a sequence of domino pieces spreading the crisis from one country to the other occurred. The 2007 crisis has now taken the form of a Eurozone sovereign debt crisis. First Greece became financially ill because of years of fiscal profligacy asked for financial assistance from the EU officials, Iceland ended up being in trouble due to a mix of housing and banking sectors’ problems and Portugal was the third country that needed financial assistance as the performance of its public finances was out of line with the Eurozone’s requirements.67 According to the domino effect theory a protective shield is required to stop the crisis from spreading and it is in my opinion that Cyprus was used from the EU officials to achieve this point.68

Due to the events aforementioned in Chapters 1 and 2, in March 2013 Cyprus’ Finance Ministry Mr Michalis Sarris said to Eurogroup that Cyprus needed €10 billion to cover fiscal needs, the restructure the banking system and for the support of the economy in general.69 Failing banks in Greece, Portugal and Iceland had been rescued before after a Eurogroup’s decision by a bail-out, a measure when outside investors rescue a borrower by injecting money to help service a debt which it can be financed by taxpayers.70 By contrast, in the case of Cyprus’ rescue the decision that Eurogroup made was that for receiving the €10 billion bailout that was required to restructure the island’s banking sector, a bail-in must be made to the creditors of the Bank of Cyprus(BoC) and Marfin Popular Bank(MPB).71 What is a bail-in? According to an article from ‘The Economist’, “a bail-in forces the borrower’s creditors to bear some of the burden by having part of the debt they

67Pedro Bacao, Joao Maria Domoningues, Antonio Portugal Duarte, (2012), “Financial crisis and Domino Effect”

68 ibid.
69Susannah Cullinane, Nick Thompson, (Mar 2013), “What has been agreed in Cyprus?”, Available

from CNN [accessed Jul 26 2014]

70The Economist explains, (Apr 2013), “What is a bail-in?”, Available from The Economist [accessed Jul 26 2014]

71ibid.

25 of 3 7 SRN: 1053148 are owed written off.”72 The bail-in of Cyprus has raised a number of concerns among EU members as it conflicts a number of European Union laws and principles, and it was used for the first the time.

The negotiations for the rescue of Cyprus between the newly Government of President Mr Nicos Anastasiades and the relevant EU officials of Troika began on March 16 2013 in Brussels. EU officials had proposed that under the rescue package a levy should be imposed on all bank accounts so that an amount of €5.8 billion could be raised. In detail, account holders with more than €100,000 would get a 9.9% levy and holders with accounts less than €100,000 would get a levy of 6.75%.73 The Parliament of Cyprus rejected the bail-in bill on March 19 2013 as it accused the proposal a bank robbery. While negotiations were still going on, the island’s Finance Minister Mr Michalis Sarris was in Moscow trying to get help from Russia as billions of Russian money were within the relevant banks. It is submitted that under the pressure of EU, the Russians rejected to aid Cyprus’ banking system so the island was left in the hands of the European lenders. After a day period of strong negotiations on March 25 2013 the final deal was agreed where a number of measures were designed to protect depositors of €100,000 or less, provide tax rises and privatisations, in order to raise billions to prevent the collapse of island’s financial sector.74 According to the bail-in deal, MPB the island’s second largest bank which sustained the most damage from bad Greek debt and loans would be closed down and on its deposits above €100,000 a levy was attached that left the relevant deposits to €100,000. MPB’s deposits of €100,000 or below were moved into BoC, and deposits in BoC more than €100,000 were frozen as levy was gonna be attached. In both banks, deposits of over €100,000 were aimed to be used to contribute billions towards the bailout(a bail-in measure). In July 2013 four months after the

72ibid.
73Susannah Cullinane, op. cit. 74Susannah Cullinane, op. cit.

26 of 3 7 SRN: 1053148 agreed bail-in measure, Eurogroup agreed on the final deposit levy of 47.5% on accounts of more

than €100,00 within BoC that will be used as equity to recapitalise the island’s banking sector.75

The deal that was agreed created a massive anger among the Cypriots as their money were stolen and the there was nothing they could do about it. People who have been working hard for years and saved money they earned are now the victims of the new measure the Eurogroup applied. “The ECB’s failure to secure a bail-out for Cypriot banking system changed the template for sovereign rescue in the Eurozone.”76 Governments of EU countries have described that Cyprus’ rescue was handled badly. As mentioned before in Chapter 1, Europe has been attacking the off- shore banking sector model of Cyprus by pointing it as money laundering jurisdiction of wealthy investors. There has been a heavy presence of Russian money in Cyprus since the 1990s as it is a tax haven and the European lenders believed that these foreign investors should contribute to the deal. It is submitted that the bail-in was aimed to avoid losses for the ECB as the levy was used to secure the repayment of the €9 billion ELA, the ELA that wrongfully was approved from the ECB without proper banking supervision through the Central Bank of Cyprus and escalated the crisis in the island. ECB applied the notion of the domino effect by keeping the island’s illness within its own territories and spreading fear to other countries about the measures that will imposed from now on.

One year after the bail-in deal of Cyprus the European Parliament approved a new framework, the EU Bank Recovery and Resolution Directive(BRRD).77 According to this new framework which aims to safeguard banking operations, protect depositors, monitor financial stability and enhance effective cooperation between banks and authorities among the EU member states, it sets bail-in measure as a tool to resolve the situation of a bank that meets the conditions for resolution.78 How

75Business, (Jul 2013), “Bank of Cyprus savers to lose 47% above €100,000”, Available from CBC News [accessed Jul 27 2014]

76Central Banking Journal, op. cit.
‘77Europa Press releases database, “EU Bank Recovery and Resolution Directive (BRRD)”,

Available from Europa EU [accessed Jul 30 2014] 78ibid.

27 of 3 7 SRN: 1053148 can such Directive been approved? A bail-in might help to stabilise a failing bank but at the same

time it is a clear robbery. Other frameworks should be approved, frameworks that protect depositors and do not steal them due to the bad management of their national banks.

28 of 3 7 SRN: 1053148

Chapter 4: The bail-in results

1. The test of illegality of the bail-in

The measures that the European Central Bank(ECB) took for “the rescue” of Cyprus banking sector clearly raise breaches on a number of legal principles. Lawyer and former Minister of Justice, Dr Kypros Chrysostomides, has identified the main breaches of the ECB;
(a) “The right to property as enshrined in the EU Charter of Fundamental Rights, Article 17(1),

which is based on Article 1 of Protocol 1 of the European Convention of Human Rights which is also binding on the institutions of the EU.79 According to Article 17(1):”Everyone has the right to own, use, dispose of and bequeath his or her lawfully acquired possessions. No one may be deprived of his or her possessions, except in the public interest and in the cases and under the conditions provided for by law, subject to fair compensation being paid in good time for their loss. The use of property may be regulated by law insofar as is necessary for the general interests.”80 The haircut was used for the public interest but ECB has not given any guarantees about compensation to the depositors that were destroyed economically and also other measures could have been taken.

(b) “The principle of non-discrimination, a general principle of EU law. The right to equal treatment is also guaranteed by the Charter, Article 20 (“everyone is equal before the law”) and Article 21(1) which contains a general prohibition of discrimination.”81 As already mentioned, a bail-in was used for the first time for the economic rescue of a country. The fact that Greece, Portugal and Iceland were rescued through a bailout and shareholders or depositors have not suffered any losses, shows a different treatment. Furthermore, depositors of the Banks in Cyprus that have been subject to a haircut were treated differently with depositors of the same Banks in

79Dr Kypros Chrysostomides (Sept 2013), “Cyprus bailout: the test of illegality” 80EU Charter of Fundamental Rights, Art 17. Right to property
81Dr Kypros Chrystomides, op. cit.

29 of 3 7 SRN: 1053148 Greece. ECB directed the whole “rescue” so that the island’s condition would not spread in

Greece but this discriminating action has put the island into a more difficult position.
(c) “The loss of bank deposits has adverse effects on other freedoms, such as the freedom to choose an occupation and the right to engage in work (Article 15 of the Charter) and the freedom to conduct a business (Article 16 of the Charter).”82 Depositors who had been saving money for future business plans are not anymore in position of conducting them as the haircut

has left them with less money than what they rightfully earned.
The ECB has violated principles of human rights and of the rule of law which are fully protected under Article 1 of the Charter of Fundamental Rights. According to Dr Chrysostomides numerous plaintiffs have been raising claims against EU and they are seeking damages in excess of €20 million.83

2. Legal basis for claims

A lot of depositors who suffered big damages after the bail-in deal have been trying since last year to identify legal avenues other than the violation of human rights, so they can get compensated for their losses. According to Central Bank of Cyprus’ articles of association, it is the Bank’s role to safeguard the island’s financial system.84 It is without objection that CBC has failed to fulfil its supervision and oversight of the Cypriot banking sector, and claims can be raised against it. In addition to that, their are serious breaches of duty from the Bank of Cyprus(BoC) and Marfin Popular Bank(MPB) towards their customers. The Banks have done nothing that can be considered for the benefit of their customers nor that they acted under reasonable care and skill.

After a decision of the Cyprus Supreme Court on June 7 2013 concerning administrative actions against BoC and MOB from applicants who held deposits within the relevant banks, it was

82ibid.
83ibib.
84Central Bank of Cyprus, op. cit.

30 of 3 7 SRN: 1053148 concluded that the only legal basis for claims would be based on a civil action for a breach of

contract before the District Courts of Cyprus. The courts will have to examine whether due to the breach of contract from the Banks there had to be an intervention of the state and/or the European Union. In addition, it should be noted that if the the relevant institution had been liquidated under Article 3(2)(d) of the Resolution of Credit and other Institutions Law of 2013 (Law 12(I)/2013) in order for a claim to be successful, the claimant must prove that the resolution has put him/her in a worse financial position.85

3. The 2013 Law on the the Reorganization of Credit and Other Institutions (Ο Περί Εξυγίανσης Πιστωτικών και Άλλων Ιδρυμάτων Νόμος του 2013 (17(Ι)/2013))

After the bail-in deal was agreed in March 2013 the Parliament of Cyprus introduced a Law on the the Reorganization of Credit and Other Institutions(Reorganization Law). This law aims to protect depositors, enhance trust within the banking system and, identify and mitigate risks that can affect the financial stability of the island.86 The responsible authority for achieving these goals is the Central Bank of Cyprus(CBC). The CBC has the authority under the Reorganization Law to give specific directions to relevant institutions in order to act according with the law. It is vital that CBC must compose accurate supervision over the institutions so it can identify in time whether an institution is on the road of insolvency and decide what are the proper measures to take so the island’s financial stability will not get affected.87 One important feature of the Reorganization Law is that the rights of depositors or shareholders of the institutions must be secured if CBC decides that some measures must be taken.88 In addition, if the measures that CBC has requested the relevant institution to do have not been made or the relevant institution’s directors have not disclosed the

85George Z Georgiou (Jul 2013), “Cyprus: The post-bailout battle”, George Z. Georgiou & Associates

86Part II section 3(1) of The Remediation and Other Credit Institutions Act of 2013 (17 (I ) / 2013 ) [Ο Περί Εξυγίανσης Πιστωτικών και Άλλων Ιδρυμάτων Νόμος του 2013 (17(Ι)/2013)]

87 Part II section 7(1) of The Remediation and Other Credit Institutions Act of 2013 (17 (I ) / 2013 ) 88Part VII section 25 of The Remediation and Other Credit Institutions Act of 2013 (17 (I ) / 2013 )

31 of 3 7 SRN: 1053148 fact that the institution is not solvent then that is a criminal offence with a penalty of imprisonment

up to 5 years or a fine up to €500,000.89 It is within my concerns as to why this law had to be introduced after the collapse of the crisis escalation.

On the other hand, under section 5(12)(a) of the Reorganization Law due to the fact that Marfin Popular Bank(MPB) has been closed all its liabilities and obligations have been transferred to the Bank of Cyprus(BoC). BoC has numerous claims for breach of contract against it from depositors who held accounts in MPB and BoC raises claims against borrowers who had not repaid their loans that MPB has given them prior its closure.

4. Troika’s Bill for the Sale of Real Estate(Bill)

In July 2014 Troika proposed to the Parliament of Cyprus a bill concerning the sale of real estate from borrowers who have not repaid their loans to the Banks.90 Troika requested that the Bill must be approved or else there will be no more funding to stabilise the island’s banking system and no amendments on the Bill should be considered. The Bill states that a bad borrower’s property in first stage will be offered for three months on sale at 80% of its original price. If it is not sold within the three months, the property will then be offered for 9 months on sale at 50% of its original price. Finally if it is not sold within the 9 months either, the property will then be offered on sale up to 20% of its original price.91 Troika’s bill is excessive as it does not consider the borrowers rights but it benefits the Banks, the Banks whose bad governance and management brought them into the position they are today. It is submitted, that the borrowers prior the levy was imposed were in a much better position to repay their loans. After the crisis a lot borrowers lost a lot of money, their salaries have been reduced, some of them are now unemployed and their is no cash-flow in the market as before. As a result of these factors it is reasonable for the borrowers for not meeting

89Part XI section 35 of The Remediation and Other Credit Institutions Act of 2013 (17 (I ) / 2013 ) 90Sigma Live News. Economy. Available from, http://www.sigmalive.com/news/oikonomia/145387

[accessed Aug 6 2014]

91ibid.

32 of 3 7 SRN: 1053148 their obligations on time. Why does Troika want to get the right of property from the borrowers once

again when it is the Banks fault of what has happened. The Banks were giving numerous loans without taking the proper measures and without considering the guidelines of the Code, and helped in destroying the island’s financial sector.

33 of 3 7 SRN: 1053148

Conclusion

All in all, it is well known that the crisis came from the USA but did it have to hit Cyprus in such degree? It is submitted that as Cyprus is a small economy, the crisis could have been avoided with less losses. Undoubtedly the Bank of Cyprus and Marfin Popular Bank have not followed the guidelines under the Cyprus Banking Governance Code. This can be identified through their poor process of giving loans and the bad investments they made on Greek Governmental Bonds. The Code is vital in Cyprus as it is in the UK and its structure is such to help the banks to operate effectively and being accountable. Accurate operation of the mentioned banks would have helped Cyprus to reduce the crisis effects.

In addition, the Central Bank of Cyprus(CBC) has failed as the central national bank. Taking into account the Bank’s actions during the last years it is sad as to how incompetent it was to fulfil its role to safeguard the stability of Cyprus financial sector and its main operation is to supervise the national banks actions and intervene accordingly. There is no rationale as to why it did stop the merge of Cyprus Popular Bank with Marfin Group, as to why it did stop the ELA provision or as to why it not intervene when the national banks were giving loans rapidly. The CBC came into breach with its own policy and did not mitigate the crisis affection on the island at all.

Finally, it is in my opinion that the European Central Bank(ECB) has played a big role on Cyprus’ situation. ECB came in breach with a number of EU laws and fundamentals. Under Article 14.14 of the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB), the aforementioned ELA operations could have been stopped if ECB have done a proper supervision over CBC. Furthermore, the bail-in deal that ECB has imposed to Cyprus in March 2013, violates human rights. How can an EU institution come into conflict with fundamental that are supported from the European Union? It is without doubt that the Banks of Cyprus and its Government have escalated the crises in the island however if ECB has done its job properly as it

34 of 3 7 SRN: 1053148 did to other EU countries for protecting their economies rather than killing them, then Cyprus would not have been is this disastrous situation.

35 of 3 7

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