Feature: Financial nightmare in Cyprus still haunts people's memory three years later

Three years to the day after the world's first bail-in Cypriots are still trying to understand why and how their lives were turned upside down in the spade of one night.

They had the unenviable experience of seeing their second largest lender going down and the primary bank seizing almost 47.5 per cent of large deposits over 100,000 euros to recapitalize as part of a 10-billion-euro financial assistance program involving harsh austerity.

But while Cypriots agree that these events overnight turned the prosperity they lived in for almost ten yeas into utmost misery, they are in confusion as to the reasons and the sequence of events that brought about the collapse of their thriving economy.

According to the vast majority of economists, the reasons for the economic catastrophe are to be found in a tangle of incompetence, short-sightedness, failures and political expediency, plus greediness.

Former President Demetris Christofias and Finance Minister Charilaos Stavrakis repeatedly assured Cypriots as recently as 2010 that the consequences of the US sub-prime mortgage crisis in 2007-2008 would not touch their prosperity.

But the crisis they said did not exist was actually looming around the corner.

Tourism marked large falls in arrivals, shipping and other overseas companies started leaving the island and the property balloon started to deflate.

Unemployment had reached an unprecedented 15 per cent by the end of 2012 and non-performing loans hit the overgrown banking system.

To make things worse, international rating agencies lowered Cyprus's creditworthiness to a point which excluded the island from international markets at the beginning of 2012.

At that point the European Union stepped in with suggestions of reforms, including a relatively small cut in salaries and pensions and cuts in government spending.

These were applied half-heartedly and did not prove adequate to keep the economy on an even keel.

By June 2012, the situation was out of control and the Cypriot government applied to the European Support Mechanism for financial assistance. A troika mission representing the European Commission, the European Central Bank and the International Monetary Fund arrived in Cyprus to negotiate the bailout terms.

The government did not immediately accept the troika demands, considering them to be unpopular. The negotiations dragged on until the end of November, when an agreement was reached providing for salary and pension cuts and tax hikes on luxury goods.

By that time the Eurogroup had decided to devalue the Greek debt by about 73 per cent.

Alexandros Apostolides, the President of the Economics and Banking department of the European University, said during a debate on state radio on Wednesday that the decision wiped off the assets of Bank of Cyprus and Cyprus Popular Bank (Laiki), which worth 4.5 billion euros. That amounted to 25 per cent of GDP.

Former Central Bank governor at the time, Panikos Demetriades, told a parliamentary hearing on the crisis months after the haircut that he was asked by the government to allow ELA to flow into the bank until upcoming presidential elections in early February 2013 were over.

The candidate of AKEL party was soundly beaten in the elections and center-right candidate Nicos Anastasiades was elected by an unprecedented margin of more than 57 per cent of the vote.

By that time Laiki Bank received 11.2 billion euros in ELA, almost two thirds of Cyprus's GDP.

"The situation could not be worse for the new president," said Apostolides.

He explained that the amount needed for the recapitalization of the banking system went up dramatically after Germany demanded and other ministers accepted that all EU banks should raise their core tier 1 capital to 9 per cent from 3 per cent.

Anastasiades was invited to Brussels to discuss the final terms of the bailout agreement. "Actually he had no choice at all" said Apostolides.

In the early hours of March 16, 2013, the Eurogroup decided on a "bail-in", the seizing of creditors' assets to recapitalize the banks.

It was the first time the term was used. But a law was thrown out by a large margin of votes on March 17, including those of the junior government coalition party.

Supporters of opposition parties sang and danced with joy in the streets outside parliament to celebrate what they considered to be a victory over the hated troika.

But on March 25, the Eurogroup finance ministers and the IMF decided in Brussels on an alternative haircut.

They forced Laiki Bank to close down, Bank of Cyprus to impose a levy on large deposits over 100,000 euros until the necessary core tier 1 capital was achieved. After paper-work, the levy came to 47.5 per cent of large deposits. The depositors became the new owners of the bank.

Apostolides said that the Cypriot banking system can now be considered to be stable and relatively healthy.

But it has to deal with non-performing loans which currently stand close to 48 per cent.

The picture will change dramatically in a few months as several loans, including large ones, have been restructured and are being serviced, Apostolides said. Endit