Demetriades on political pressures on central banks and their governors

Posted by ap507 at Sep 25, 2018 11:54 AM |
Professor Panicos Demetriades, former governor of the Central Bank of Cyprus, has been interviewed by Central Banking
Demetriades on political pressures on central banks and their governors

L to R: Central Banking’s Christopher Jeffery with Panicos Demetriades

Think: Leicester does not necessarily reflect the views of the University of Leicester - it expresses the independent views and opinions of the academic who has authored the piece. If you do not agree with the opinions expressed, and you are a doctoral student/academic at the University of Leicester, you may write a counter opinion for Think: Leicester and send to ap507@le.ac.uk

Cypriot banks pre-crisis offered high levels of interest on deposits, and then embarked on risky overseas expansion, and invested in property developments and high-risk Greek government bonds – their holdings were larger than Cypriot government bonds. Did you find out why banking supervisors permitted such large investments in risky Greek government bonds?

 I tried to find out how that happened. According to Basel rules, you could switch from German bonds to Greek government bonds, and you didn’t really need to hold more capital – so it was regulatory arbitrage. The central bank did try to ask the banks to hold more capital, but it didn’t go as far as to stop them, to say: “No, you can’t have 100% of your own capital in Greek government bonds.” Which, with hindsight, is what they should have done. But no-one knew at the time that this [80% haircut on Greek bonds] was going to happen. My predecessor has gone on the record saying that he wasn’t expecting the Greek debt writedown, the Greek PSI (private-sector involvement), to happen. So that must be the reason.

 So there was a strong expectation that there wouldn’t be a writedown?

 Yes.

You have stated that some Cypriot law firms, connected to the banks and to local politicians – who backed the banks, it seems, throughout the crisis – acted as introducers to wealthy Russian clients, and received commissions for this work. Was this interconnectedness one of the root causes of the problem?

 This goes to the heart of the crisis, really, because the banking system doubled in size in terms of the balance sheet in less than six years. Soon after Cyprus joined the European Union, there was an influx of money, and a lot of it was from Russia and also from the other former Soviet republics, especially Ukraine. So they aggressively went out to get Russian business, not just deposits in the banks, but business generally – helping to set up companies and helping them in terms of whatever disputes they had. Even today, a lot of disputes among Russians are resolved in the Cypriot courts. It was good business for the lawyers, obviously, but with it, we had a lot of negative consequences for the country, including the build-up of systemic risk...

 

 

 

 

 

 

 

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Think: Leicester does not necessarily reflect the views of the University of Leicester - it expresses the independent views and opinions of the academic who has authored the piece. If you do not agree with the opinions expressed, and you are a doctoral student/academic at the University of Leicester, you may write a counter opinion for Think: Leicester and send to ap507@le.ac.uk