Bad practices by bankers, lax supervision by regulatory authorities and gross negligence by politicians are to be blamed for the collapse of the economy of Cyprus, a leading lawmaker who headed a major probe into the eastern Mediterranean island's economic collapse said on Saturday.
Demetris Syllouris, who presides over the watchdog Institutions Committee of the Cypriot parliament was commenting on a report issued at the end of a 10-month investigation into the meltdown of the economy after Cyprus was shut out of international markets in the middle of 2011.
Cyprus received a 10-billion-euro bailout and entered into a strict economic adjustment program in April, 2013 which helped it back from the brink of default. But more damaging to the island's economy was the collapse of its oversized banking system caused by the resolution of its two systemic banks.
Cyprus Popular Bank (known as Laiki) which had even larger operations in Greece was liquidated after amassing a huge debt by borrowing from the European Central Bank. The island's primary lender, Bank of Cyprus, was forced to seize its depositors' money to recapitalize in the world's first bail-in.
The 440-page report, extending to 1,200 pages with annexes, was made public on Friday night. It contains a long list of loans totaling many billions of euros which were either written off by banks or given to people and legal entities either at a minimal interest or without any interest at all. Some large loans had inadequate guarantees or no guarantees.
The report is non-binding, but it called on competent authorities, the Attorney General and the Police, to pick up from where it stopped and probe further into the practices of the bankers with a view of bringing before the courts those who committed criminal acts.
It accused the management and officials of Laiki that by acting in a methodical, systematic and criminal manner they caused its collapse which dragged down the Cypriot economy.
The report concluded that there had been a strategy of uploading debt onto Cyprus though Laiki's Greek extended operations, leading the bank to increase its exposure to Emergency Liquidity Assistance (ELA) from the European Central Bank.
It said ELA money was transferred to Greece either as loans with minimal security or to cover interbank lending there.
The report detailed the outflow of several billion euros to Greece even after Laiki was effectively nationalized when the state pumped 1.8 billion euros (2.5 billion U.S. dollars) into the lender to keep it alive in July 2012.
It also demanded an investigation why the government had made the decision to prop up the bank, knowing the real situation.
"The liquidity and solvency problems were known to government officials who possibly acted in gross negligence, providing assurances and state guarantees so that an effectively insolvent entity could continue to operate," the report said.
It added that an important factor for the increased drawing of liquidity was the large increase of loans compared with deposits, as well as the rise in provision for bad debts for problematical loans in Greece.
"In the view of the committee, this in combination with the loss of deposits was the main reason for the continuous increase of ELA that brought about the dramatic effects and the collapse of the banking sector in Cyprus," the report said.
It added that tapping ELA was done without restrain and without considering the negative effects for the economy.
By March 28, 2013, Laiki had borrowed 9.1 billion euros, more than half of Cyprus's 17.5-billion-euro GDP.
The Committee concluded that the Cypriot economy was led into disaster in just 42 days, from May 23 to July 3, 2012, when Laiki increased its ELA borrowing by 6.2 billion euros.
The report recommended further investigation of this fact to determine why Laiki was allowed to draw so much liquidity and where the money ended up.
"The committee thinks further investigation should be carried out into whom and under what conditions, criteria and guarantees they approved drawing ELA, especially after July 2012, when Laiki came under state ownership," the report said.
Committee president Syllouris told the state radio that both former Central Bank Governor Panicos Demetriades and the previous left-wing government were to be blamed because they knew about this dramatic increase in ELA support for Laiki and did nothing to stop it.
Demetriades had told another investigation that he did not intervene to stop the bank drawing ELA support at the behest of then President, Demetris Christofias, who did not like to leave the bank collapse ahead of presidential elections coming up a few months later.
Syllouris also said Christofias was to be blamed for the collapse of the economy because he consented to European Union leaders' decision for the writing down of the Greek debt by about 75 percent, without asking for safeguards from Cyprus's European partners.
"Cypriot banks lost 4.5 billion euros overnight as a result of the Greek haircut at a time when the state was unable to support them," said Syllouris.
Cypriot banks had invested heavily in Greek bonds by purchasing from other European banks which were unloading them.
A separate investigation is under way into the purchasing of Greek bonds by Bank of Cyprus, even after it was warned about the dangers and its executives had given assurances that the bank had sold a large part of the Greek debt in its possession.
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