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Greek subsidiaries should go

The three-week bank holiday of the banks in Greece and the imposition of capital controls has brought back bad memories for Cypriots, who saw their country become the first eurozone member to have to impose such measures in 2013.

It is also making people worry about the health of the Greek subsidiaries in Cyprus. Based on their first-quarter accounts Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank together had €8.7bn in deposits including those of financial institutions, which accounted for 18.6% of all deposits in the banking system. In an interview with the Cyprus Weekly, Marios Zachariadis, Associate Professor of Economics at the University of Cyprus and member of the recently formed Fiscal Council, explained that there is no immediate danger for the Greek subsidiaries in Cyprus.

No haircut risk
“These are separate banks when it comes to the mother and the subsidiary so they are not directly affected by anything going on in Greece. They cannot be hit by a haircut in Greece,”he emphasises.
One of the raft of measures Greece was given just a few days to pass this week was the Bank Recovery and Resolution Directive (BRRD). A key part of the BRRD is a provision, after all other avenues have been exhausted, for the infamous “bail in” of uninsured depositors that was applied to Cyprus two years ago.

While the subsidiaries in Cyprus will not be haircutted, the developments in Greece will take their toll on the subsidiaries eventually, Zachariadis believes. One of the reasons is that it will take some time before it is clear what will happen to the banks in Greece.

The agreement forged with the EU leaders in the early hours of Monday morning included the establishment of a buffer of between €10 billion and €25 billion for potential bank recapitalisation and resolution costs. However, the Single Supervisory Mechanism (SSM) will not conduct a comprehensive assessment until the fourth quarter, meaning that the exact amount of capital needed and whether the bailout funds will be enough, will remain uncertain.
“These are banks that currently carry the brand name of their mother banks in Greece which face financial instability at least over the next few months and the possibility of being dissolved or diluted in terms of shareholders or nationalised,” said Zachariadis.
“That creates uncertainty.”

He believes that there will be no lifting of capital controls in Greece until the bank assessment is over at best. “The Greek subsidiaries will inherit some of the uncertainty of the Greek banking system – it is inevitable.”

One reason for uncertainty is that it is clear the parent bank will not be able to support the subsidiary in case of need. Based on the latest available data to the end of March, the Greek subsidiaries are liquid so that is not currently an issue. But given how rapidly banking fortunes can change, it could become so.

“Big banks like Barclays or SocieteGenerale provide liquidity to their subsidiaries when needed. But the Greek mother banks will never be able to do that for theirs.”

Best to move now
Zachariadis said that rather than see a slow decline of the subsidiaries, it is best to move now to sell them off before it is too late.

“What I see is tendencies. I have studied crises and lived crises,” said the economist who shifted money out of Cyprus in 2011 because he saw the crisis building. “I don’t want us to be exposed to that in any way.”

The Central Bank of Cyprus cannot simply shut the subsidiaries down, since they are unlikely to be insolvent. Selling to local banks is also not the best idea if it is done at too high a price, says Zachariadis.

“They might be tempted to pay too high a price just to get bigger.” This is a problem because of all the sectors in Cyprus, banking is the most rigid. For example, strong union membership means that they suffered smaller salary cuts than in the public and non-bank private sectors.

“My preferred solution would be a serious foreign financial institution comes in. That’s what we need in Cyprus. The Central Bank within the bounds of its legal mandate should do everything possible to facilitate that.”

Tiny ray of hope for Greece
Asked if the Greek programme is implementable, he said that the budget surpluses being projected are “idealistic”.

However, the structural reforms such as opening up markets are key. One of the reasons Greece suffered far more than Cyprus, he explains, was because the rigidities, closed markets and oligopolies made it hard for businesses to adapt.

“There is no good solution for Greece. Hopefully, if it shows some credibility and implements some reforms first, it puts Greece in a better place in terms of the economy.”

This will gain the government two things, he says. “The economy is put on a different path. People understand this and they react to it. Even before you fix it they start reacting to it. Second, it buys credibility and builds trust with the other eurozone countries. Both of these would then improve the Greek negotiating position.”


By Lefteris Adilinis and Fiona Mullen

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