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Government steps in to shore up Popular Bank

The government has agreed to underwrite a 1.8 billion Euro share capital increase by the Island’s second largest bank, the Cyprus Popular Bank, to help it recapitalize and meet EU Banking Authority capital requirements.

THE House of Representatives late last night approved legislation providing for state support to the island’s second largest lender, the Cyprus Popular Bank.

The item was passed with 43 votes for, none against, and three abstentions.

It enables the Republic to underwrite a €1.8 billion equity issue by the Popular Bank, heavily exposed to Greece and scrambling to meet a shortfall on its regulatory capital by a mid-year deadline.

The amount, equivalent to about 10 per cent of Cyprus’ GDP, forms the bulk of a €1.97 billion capital shortfall identified by the European Banking Authority, which the Popular Bank needs to replenish by June 30.

Popular was hit heavily by a write-down in its Greek sovereign bond holdings. It reported record losses of €2.8 billion in its full-year 2011 results, mainly on the back of a 76 per cent write-down in the value of some €3 billion in Greek bonds held.

The lender, the most exposed among Cypriot banks to Greek bond holdings, said in a statement yesterday that the Cabinet had approved plans to underwrite its capital hike.

In legislation submitted to parliament as a Ministerial Decree, the Finance Ministry said it would act as underwriter of the new €1.8 billion capital issue, which would be in the form of a rights issue.

The issue would be offered by priority to existing shareholders, to the public in a public offer, and to a small number of individuals with a private placement.

The Republic would acquire any un-disposed of shares, by offering the Bank 12 month zero-interest sovereign bonds.

Any shares acquired by the state could be repurchased within five years either by shareholders, the bank itself or third parties.

The Republic reserves the right to sell its shares at any time to a strategic investor, with existing shareholders being given the right of first refusal.

Once the decree is published the state will be allowed to appoint up to five members of Cyprus Popular Bank’s board – it now has 13 directors – who would have veto rights. Should the state acquire shares it would be entitled to appoint up to a majority of the board.

Dividends would also be stopped.

The exercise price of the rights was set at €0.10, with the share purchase price for the state at €0.10 and “fair value” for third parties.

The legislation further sets a cap on the salaries of the bank’s high-ranking officers and board directors, which in some cases results in an up to 12.5 per cent pay-cut.

An independent adviser would be mandated to submit a restructure plan to the central bank within two months of its appointment. Within six months at the latest, the plan would be submitted to the European Commission for approval.

The legislation was forwarded as a matter of urgency to the House Finance Committee, which began a lengthy session behind closed doors at 4.40pm with a view to preparing a final draft to be submitted to the plenum for a vote. Other legislative business was necessarily put on hold, with MPs deciding to sweat it out so that the new law could be published in the government gazette today.

The session was attended by Finance Minister Vasos Shiarly, Cyprus Popular Bank chairman Michalis Sarris, representatives of the Central Bank and of the Cyprus Stock Exchange, and was observed by some 30 MPs from committees other than the Finance Committee. Shortly after 8pm the committee took a brief break before resuming discussion.

The plenum convened well past midnight, with the voting complete at 1am. Absent from the hall during the voting on the crucial bill were the leaders of the DISY, AKEL and DIKO parties.

In their closing remarks before the show of hands, several opposition MPs voiced their dissatisfaction at being cornered by the government to pass the bill on such short notice.

“Now is not the time to discuss how we got here,” said DIKO’s Nicholas Papadopoulos, alluding to the state of the Popular Bank. He added ominously: “I’m afraid that tonight we inaugurate our path towards a support mechanism. I hope I’m proven wrong.”

And DISY No.2 Averof Neofytou said: “Tonight, we vote based not on ideology or sentiment. We vote for our country, and to us, the country is above parties and ideology.

“Tonight was the easy part,” he went on to say, alluding to the next stage – whether the state can secure funds from lenders abroad.

Readers' comments

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  • @All – Update today (24/05/2012) from Stockwatch

    Cyprus Popular Bank Chairman, Michalis Sarris expressed his optimism for the future of his bank.

    At a press conference held one day after the government and the Parliament approved the five state representatives in the Board of Directors of the bank, Mr. Sarris appeared optimistic that the government’s actions to support the bank will be helpful in the effort to find capital so that the bank is ready to contribute towards growth.

    “When we took over this year, our goal was to achieve a timely recapitalization of the bank so as to contribute to recovery and growth as soon as possible”, he said.

    Our efforts to find strategic and other investments are many, although it stumbles at the significant exposure of the Cypriot banks to the Greek economy, he said.

    “The Board of Directors tried to find ways to restrict the risks from the great exposure to the Greek economy”, he added.

    “However, the political developments in Greece do not facilitate our task to find investors”, he noted.

    Referring to the underwriting of the issue of €1.8 by the government, Mr. Sarris said that the government’s action ensures the success of the issue, which will allow the bank to play its role in the recovery of the Cyprus economy as soon as possible.

    His messages to the Cypriot shareholders and customers were optimistic; “We strongly believe had a bright past, has a stable present and will have a significant future”.

    As for its exposure to Greek bonds, he said that it is of €11 billion in various sectors with different risk.

    “The venture to merge two large Cypriot banks is difficult. The Cyprus economy must be served by competitive environment while it would be difficult for the citizens to be served by one bank only”, he concluded.

  • Steve says:

    It’s ironical that the Hellenophile Cypriots have been conned by their adored Greek cousins. A recent newspaper article in the UK asserted that the Greeks had lied about their finances in order to join the Euro and continued to lie in order to stay in the Euro. Now Cyprus, a country that has caused so much pain and heartache to others in its property market, is going to have a taste of what it’s like to be screwed.

    I think myself a sympathetic kind of guy normally, but in this case I find it hard to sympathise.

  • Frank says:

    I’m glad that the Cypriot government will support Marfin. I had planned to guarantee the Popular Bank’s debts myself, as my credit rating is better than that of the government of Cyprus. Now I am spared the risk.

  • AnnDee says:

    Two destitute down-and-outs swapping their rags and thinking they will be better off.

  • Andrew says:

    This all sounds like the beginning of the end rather than the end of the beginning.

    It is sickening to realise how badly represented the ordinary people of the world are. Many of us elected those responsible for allowing this mess to happen. Many of us are going to suffer in the future, for their collective failings and their greed.

    Think long and hard next time you go to the ballot box!

  • Costas Apacket says:

    A bankrupt state guaranteeing a bankrupt bank?

    Sounds Kosha!

  • Gavin Jones says:

    But who will “shore up” the Cypriot state?

  • Odd_Job_Bob says:

    This is probably the funniest article I’ve read on this forum in a long, long while!

    In summary: the Cyprus government is to support a failing bank, the Cyprus Popular Bank which has lost lots of money in Greek Bonds, by issuing and selling more shares in the failing bank to potential investors. If no-one buys the shares, the government will buy them itself, but instead of using cash, sell the bank its very own Cyprus government bonds. Agreed?

    Ok, let’s substitute any reference to the government with the words “Clueless Scam Artist”; “shares/ rights issue” etc with “buttons” and “investors” etc with “really stupid people”. You may also choose to refer to any government bonds (be they Greek or Cypriot) as “pieces of poo”. Go on, try it!

    The article reads much more realistically!

    And there was I thinking that the Hy Brasil analogy of last year was a bit harsh…

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