Insight: Why did Cypriot banks keep buying Greek bonds?

Tue Apr 30, 2013 1:34am EDT
 
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By Michele Kambas, Stephen Grey and Stelios Orphanides

NICOSIA (Reuters) - One day last October, a memory stick containing special software for deleting data was placed into a desktop computer at Bank of Cyprus.

Within minutes, 28,000 files were erased, according to investigators who had wanted to copy the data for an official report into the collapse of the Cypriot banking system.

The deleted files included emails sent and received in a crucial period in late 2009 and early 2010 when Bank of Cyprus, the biggest lender on the island, spent billions of euros buying Greek bonds - at a time when international banks were cutting exposure to the heavily indebted Athens government.

Those Greek bonds lost most of their value in last year's EU-sanctioned bailout, playing a key role in plunging Cyprus into an economic maelstrom. When banks turned to Cyprus's own cash-strapped government for help in plugging holes in their balance sheets, Nicosia too needed an international rescue.

Now people in the small euro zone republic, who have lost money and face years of grim austerity, want to know who decided to plough their savings into the doomed public accounts of their bigger neighbor, and why. But answers are proving elusive, not helped by the mysterious wiping of data at Bank of Cyprus.

There has been public speculation about backroom diplomatic deals or misplaced solidarity with Cypriots' fellow Greek-speakers.

But executives at the failed banks argue that Greek bonds seemed a good investment at the time - though that view is at odds with that of many bankers elsewhere in Europe, who were doing all they could to limit their own exposures to Greece.

The confidential report, prepared for the Cypriot central bank by global consultants Alvarez and Marsal, found that Bank of Cyprus had been willing, from 2009 onwards, to invest in risky, high-yielding Greek debt in a bid to offset an erosion of its balance sheet from rising non-performing loans.   Continued...

 
A man walks past a branch of Bank of Cyprus in Nicosia March 31, 2013. REUTERS/Yorgos Karahalis