Laiki pays price for Greek over-reach
By Kerin Hope in Athens Financial Times
For two decades Laiki Bank has struggled to catch up with Bank of Cyprus, the island’s largest financial institution, in a battle for market share that extended to Greece, eastern Europe and even the UK.
Laiki, or “Popular” bank, finally overtook its rival this week, becoming the first Cypriot bank to be placed under administration as the government fought to avoid a disorderly bankruptcy and, possibly, an exit from the euro.
The ignominious turn in the bank’s fortunes is an apt symbol of Cyprus’s own fortunes. Laiki and Bank of Cyprus played a pivotal role in the island’s financial services industry, welcoming Russian entrepreneurs who arrived at first with cash-filled suitcases, then set up companies on the island run by local lawyers and accountants. Bank transfers between Russia and Cyprus last year totalled more than $250bn.
“Light-touch regulation was key to Cyprus as a financial centre,” said a former Laiki executive who declined to be identified. “But all that may be history by the end of this weekend, along with the banks.”
Founded in 1901 as the Popular Savings Bank Limassol, Laiki handled the affairs of Slobodan Milosevic, the former Yugoslav strongman, and his family. They moved billions of dollars in cash through Laiki in the 1990s in defiance of UN sanctions against the former Yugoslavia.
The bank was set to become the European investment vehicle of Dubai’s sovereign wealth fund in a bold plan that collapsed when the global financial crisis erupted in 2008.
Legislation splitting Laiki into “good” and “bad” banks was approved by parliament on Friday after the European Central Bank warned it would cut off emergency funding that has kept the bank afloat for more than a year.
A recapitalised “good” bank would hold deposits below €100,000 owned by some 350,000 account holders, while the remaining assets, including those of several thousand Russian and Ukrainian companies, would be put into a “bad” bank, losing up to 40 per cent of their value.
Laiki’s collapse has come only months after the Cyprus state injected €1.8bn of capital and took over management following a dispute with Greece’s Marfin Investment Group, the bank’s biggest shareholder.
But it had been fatally weakened by exposure to Greek sovereign bonds, which lost 70 per cent of their value in a partial default, and a high percentage of bad loans in its Greece branch network.
“It got into trouble because of very aggressive expansion mostly in Greece,” said Lambros Papadopoulos, an independent analyst. “The balance sheet got overstretched and then Greece went wrong.”
Other analysts say Laiki’s move into Greece was badly timed. It sought to penetrate the corporate market there just as recession hit.
The Greek finance ministry has pledged to protect Greek account holders by merging the Athens-based operations of both Laiki and Bank of Cyprus, and arranging a €1.5bn capital injection before they were offered for sale. Greece’s Piraeus Bank, whose largest shareholder is a Russian fund, said on Friday it had agreed to buy the Cypriot banks’ Greek networks for an undisclosed price.
Laiki was kept afloat by about €9bn of emergency liquidity assistance from the ECB. But its fate was sealed this week when Michalis Sarris, the finance minister and former bank chairman, failed to find a Russian strategic investor during a trip to Moscow.
It was unclear yesterday whether Bank of Cyprus would follow its rival into administration. BoC has managed to avoid a recapitalisation and has only about €1bn of ECB liquidity assistance on its books. But its loan book includes large amounts of unrecognised bad debt.
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