Key documents missing from Bank of Cyprus records

Former chief executive had ‘wiping software’ on his computer, investigation reveals

Fri, Apr 5, 2013, 17:04

Two of the most senior executives at Bank of Cyprus may have deleted crucial email documents last year related to what proved to be a disastrous decision to invest heavily in Greek government bonds just before Greece's international bailout in 2010, according to an investigative report commissioned by the central bank of Cyprus.

The report said forensic experts found that the computer belonging to the bank's former chief executive, Andreas Eliades, who was forced to resign last summer, had "wiping software loaded which is not part of the standard software installations" at the Bank of Cyprus.

Investigators also found such software on the computer of Christakis Patsalides, a senior executive in the bank's treasury department who, according to the report's findings, was a driving force behind the decision to buy the Greek government bonds. Mr Patsalides has also left the bank.

The report said Mr Eliades did not "participate or assist" in the investigation, despite being urged to do so by the bank and its outside lawyers. The Bank of Cyprus, long considered the better run of the two large banks that have been at the center of the Cypriot bailout debacle, decided to speculate in high-yielding Greek bonds in 2010, just as the Greece government was running out of money.

That decision resulted in a loss of €1.9 billion, when bond investors were eventually forced to take a 75 per cent haircut under the final terms of the Greek bailout, worked out last year. That loss, and a larger one at the other big Cypriot bank, Laiki Bank, on a similarly misguided investment foray, totaled €4.5 billion. That was more than Cyprus, with a gross domestic product of €18 billion, was able to sustain.

The losses led to the near-collapse of the Cypriot banking sector, leading the country's government to seek a €10 billion bailout from the troika of international lenders: the International Monetary Fund, the European Commission and the European Central Bank.

Under the terms of the bailout, the Bank of Cyprus' biggest depositors will be forced to take losses of as much as 60 per cent to help absorb the cost of cleaning up Cyprus' financial mess.

The issue of how the banks became laden with Greek government bonds has become an explosive one in Cyprus as politicians and regulators scramble to explain to furious taxpayers why the country has been forced to impose harsh measures on bank clients of all sizes, including restrictions on fund transfers and withdrawals.

A committee of judges has already been appointed by the government to get to the bottom of the matter. The report that surfaced yesterday was by the Cypriot central bank last August, well before the country's bailout was made final. The central bank hired Alvarez & Marsal, a financial consulting firm, to investigate how and why the Bank of Cyprus had come to make such a high-risk gamble.

Investigators say that from August 12th last year, the central bank had ordered that all electronic data at the banks be preserved. The report did not say when the file-wiping software on Mr Eliades' and Mr Patsalides' computers was installed. But investigators did suggest that digital documents could have been erased during the many delays that followed Alvarez's requests for documents.

"Mass deletion of data appears to have been undertaken on the Patsalides computer on 18 October 2012," the report said. The findings of the Alvarez report, especially the contention that top bank executives may have obstructed a central bank investigation, are likely to stir anger widely in Cyprus. And while the top executives and board members most closely tied to the Greek bond purchase are no longer with the banks, the allegations could raise further questions about the Bank of Cyprus' ability to survive.

The Alvarez report provides new details on the extent to which Bank of Cyprus officials were hoping that the high yields generated by the Greek bonds would cover the bank's imploding loan book. Alvarez investigators said that, according to the records they were able to secure from the bank, the decision to buy the bonds was based on a last gasp effort by the bank to generate profits as their loan book began to sour in late 2009 and through the spring of 2010.

Investigators also said that the bank, like others in Europe at the time, made use of cheap financing from the European Central Bank to make these bets. As a result, executives in the bank's treasury department bought the riskiest high-yielding bonds available and found willing sellers in banks eager to reduce their exposure to Greece.

When it became clear not long after the Greek bailout in May 2010 that some form of debt restructuring would have to take place, the Bank of Cyprus found itself stuck with a €2.4 billion portfolio of Greek bonds.

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