[LINK] "Why Cyprus went bust, and the case of the mystery memory stick"
Via Nicholas Whyte I came across Peter Birks' account of what is--at best--remarkable incompetence on the part of the Cypriot financial sector in buying up Greek sovereign debt, aggravated likely by some guilty knowledge on someone's part. (This Reuters article goes into more detail.)
By April 2010 Bank of Cyprus had €2.4bn worth of Greek bonds - above the Bank's own limit, but that limit was raised a month later. Bank of Cyprus bosses still maintain that "everybody was buying into Greek bonds at the time". Well, yes, there were lots of sellers (mainly banks) and lots of buyers (mainly private equity speculators). There were not many bank buyers. At the end of 2010, only two banks in Europe actually had bigger holdings than BoC (€2.2bn) and Laiki (€3.3bn). Those banks were the vastly larger operations BNP Paribas and Société Générale. And both these banks got hurt hard when the default came.
More interestingly, it appears that the Bank of Cyprus knew that it was in a bit of a mess. Notwithstanding the claim that Kypri was only referring to a short-term sell-off in response to market conditions, in April 2010 BoC moved €1.6bn in Greek bonds out of its trading book and into its "held to maturity" book. That meant that the bank could count the Greek bonds at the price it paid (the value of Greek bonds had been falling for some time). BoC said at the time that the move was made because Greece would redeem the bonds - a triumph of hope over reality, as the events of early 2012 proved.
Andreas Eliades, CEO of the group until April last year, still insists that no-one could have imagined that a European country in the euro could default.
That, of course, is an excuse we have heard from many others in the banking sector - not just in Cyprus. "No-one could have foreseen it; no-one predicted it", was said again and again, despite the fact that from 2000 onwards several people were foreseeing a credit bubble and several people were predicting that it would end in tears.
When the axe fell last March, Bank of Cyprus was €1.8bn in the hole. Cyprus, whose GDP outside of offshore banking was tiny, was never going to be able to bail out BoC and Laiki. I've written before about the farce that led to a short period where all bank deposits at Boc and Laiki were going to suffer a hit. That nightmare scenario, which within 18 months would have led to banking crises in several other countries in the eurozone (starting with Slovenia) was thankfully abandoned a week later. But the larger depositors had to take a hit, and the effect was to destroy the Cypriot financial system. No-one would leave money in the Caymans if they thought their money would be confiscated. For Cyprus, the game is over and the economy is shot.
But things get even murkier. As we've seen, it would appear that the managers of the bank were almost operating on their own, with a Board of Directors who didn't really know what was going on. Was this true?
We shall never know. As Reuters reported, one day last October a memory stick was placed into a desktop computer at the Bank of Cyprus. There was some clever software on that memory stick. It quickly erased a staggering 28,000 files, including internal emails in late 2009 and early 2010 - precisely when many of the Greek bond purchases were taking place.
By April 2010 Bank of Cyprus had €2.4bn worth of Greek bonds - above the Bank's own limit, but that limit was raised a month later. Bank of Cyprus bosses still maintain that "everybody was buying into Greek bonds at the time". Well, yes, there were lots of sellers (mainly banks) and lots of buyers (mainly private equity speculators). There were not many bank buyers. At the end of 2010, only two banks in Europe actually had bigger holdings than BoC (€2.2bn) and Laiki (€3.3bn). Those banks were the vastly larger operations BNP Paribas and Société Générale. And both these banks got hurt hard when the default came.
More interestingly, it appears that the Bank of Cyprus knew that it was in a bit of a mess. Notwithstanding the claim that Kypri was only referring to a short-term sell-off in response to market conditions, in April 2010 BoC moved €1.6bn in Greek bonds out of its trading book and into its "held to maturity" book. That meant that the bank could count the Greek bonds at the price it paid (the value of Greek bonds had been falling for some time). BoC said at the time that the move was made because Greece would redeem the bonds - a triumph of hope over reality, as the events of early 2012 proved.
Andreas Eliades, CEO of the group until April last year, still insists that no-one could have imagined that a European country in the euro could default.
That, of course, is an excuse we have heard from many others in the banking sector - not just in Cyprus. "No-one could have foreseen it; no-one predicted it", was said again and again, despite the fact that from 2000 onwards several people were foreseeing a credit bubble and several people were predicting that it would end in tears.
When the axe fell last March, Bank of Cyprus was €1.8bn in the hole. Cyprus, whose GDP outside of offshore banking was tiny, was never going to be able to bail out BoC and Laiki. I've written before about the farce that led to a short period where all bank deposits at Boc and Laiki were going to suffer a hit. That nightmare scenario, which within 18 months would have led to banking crises in several other countries in the eurozone (starting with Slovenia) was thankfully abandoned a week later. But the larger depositors had to take a hit, and the effect was to destroy the Cypriot financial system. No-one would leave money in the Caymans if they thought their money would be confiscated. For Cyprus, the game is over and the economy is shot.
But things get even murkier. As we've seen, it would appear that the managers of the bank were almost operating on their own, with a Board of Directors who didn't really know what was going on. Was this true?
We shall never know. As Reuters reported, one day last October a memory stick was placed into a desktop computer at the Bank of Cyprus. There was some clever software on that memory stick. It quickly erased a staggering 28,000 files, including internal emails in late 2009 and early 2010 - precisely when many of the Greek bond purchases were taking place.