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Greeks destroyed in Cyprus bail-in now have recourse to Justice

Foreigners were unduly penalized in the Cyprus bail-in implemented by the government of Cyprus according to a memorandum signed with the IMF, the ECB, and the European Commission. Fearing the downturn in the Greek economy several hundreds, perhaps thousands of Greeks sought to secure their savings in Cyprus, before there were any capital controls in the country. Their fortunes were wiped out overnight. Now, over 900 of our compatriots are seeking for compensation in international arbitration.

Unwitting victims

In 2012-2013, the banking sector of the Republic of Cyprus experienced a crisis after exposure to over leveraged local property companies, the Greek (government) debt crisis, and the downgrading of national bond credit rating to junk. This led to an inability to seek funding from markets and was further enhanced by the Cypriot government's reluctance to refinance the banks.

In order to set the banking sector on its feet and bolster the sagging situation of the Cypriot economy, a deal was agreed upon with the troika of lenders (the ECB, the IMF,and the European Commission) which included among other measures the recapitalization of the entire financial sector while accepting a closure of Laiki bank, the country's second largest bank. Laiki Bank good assets and deposits below €100,000 would be saved and transferred to Bank of Cyprus (BoC), while shareholder capital would be written off, as would the uninsured deposits above €100,000.

The bail-in disproportionately affected foreigners, and among them Greeks who had sought refuge for their capital from the plummeting Greek economy. For many of the Greek victims of the bail-in, this was a catastrophe they had sought to avoid by securing capital in Cyprus, and which for many had dire consequences. At the time the Greek government had yet to implement capital controls, so transfer of clean legitimate capital to other EU states was still an option for Greek citizens.

For many Greek depositors in Cyprus banks this proved an utter catastrophe. Life savings were wiped out, whole families were left destitute in a flash. Some suffered calamities to their health. Others could not pay to maintain their health, or pay for private health care as the Greek social security system crumbled. Future college tuition for scions were obliterated.

Mr Panagiotopoulos and his wife who lost one million euros both suffered severe ailments they attribute to their loss. The wife suffered a stroke and her husband developed heart disease. Now they worry about how they will provide for themselves after losing all their money. They feel they were maliciously robbed of their lives' savings and were anxious to find some way to recoup their losses. The couple feel that despite the fact that they kept close contact with the manager of the branch where they had deposited their money, and he was very reassuring until the fateful day of the bail-in, after which no one would answer their calls.

Many feel utterly embittered because of what they believe was a fraud. One such person, who wanted to remain anonymous, believes he was fooled into “investing” in over-the-counter- derivatives that the banks created, which also “evaporated” during the bail-in. His feelings were that everything was done to persuade him to buy the said product that was “safer and more lucrative” than just a savings, or other account. In fact these were almost inherently toxic as proved to be the case

One most distressing case was money that had been won in a medical settlement that was placed in Cyprus for a patient that will require lifelong hospice, disappeared, and along with it any hope for a decent life.

The bail-in was in many ways insidious and was misrepresented abroad. Speaking to an Athens University professor in economics, who specializes in market behavior, he was surprised when the effects of the bail-i n on foreign clients was revealed to him. He had believed that Laiki Bank accounts, under 100,000 euros had been transferred to the Bank of Cyprus.

This was quickly rectified through a conversation with a Cypriot market analyst who now works in Athens for a major international brokerage firm. In his opinion the bail-in was constructed thus, in order to deprive, mainly, foreigners of their capital. Foreign nationals, of course, have no bearing on who is elected on Cyprus, but locals vote, and decide who will govern!

However, as things go, even nations can be brought before the Law. The law firms Grant & Eisenhofer PA (based in New York City) and Kyros Law (based in Athens), together with other counsel, were made aware of the case and issued a call for people who felt aggrieved in this bail-in. As Greece has a Bilateral Trade Treaty with Cyprus, such involuntary seizure of assets cannot be conducted without due compensation. The legal firms are now prosecuting claims against the Cypriot government in an international arbitration proceeding before the World Bank's International Centre for the Settlement of Investment Disputes.

Unfolding the bail-in

By 2011, Cyprus was unable to raise liquidity from the markets to support its financial sector, and consequently requested a bailout from the European Union. This despite a “hair-cut” of upwards of 50% in 2011 and a a €2.5bn (US$3.236 billion) emergency loan from Russia to cover its budget deficit and re-finance maturing debt. The Russian loan however, did not include any funds for recapitalization of the Cypriot banks. On 25 June 2012, the government of Cyprus sought a bailout from the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM).

After some hassles between the so-called troika of lenders (IMF, European Commission, European Central Bank) a deal was agreed upon and endorsed, on 30 April 2013, by the House of Representatives, which included among other measures the recapitalization of the entire financial sector while accepting a closure of Laiki bank, the country's second largest bank.

The remaining Laiki Bank good assets and deposits below €100,000 would be saved and transferred to Bank of Cyprus (BoC), while shareholder capital would be written off, and the uninsured deposits above €100,000 – along with other creditor claims – would be lost to the degree being decided by how much the receivership subsequently can recover from liquidation of the remaining bad assets. The majority of uninsured deposits were held by foreigners, mostly Russians, but also by quite a number of Greeks who had sought refuge for their capital from the plummeting Greek economy.

During the negotiations leading up to the MOU with the Troika, the government of Cyprus claimed, and perhaps, rightfully, that it felt, pressured.

However, the truth is that the Troika never forced the Cyprus government to discriminate against Greeks or adopt Plan B. Plan A (which imposed the same levy on everyone, not primarily on foreigners) could easily have done the job or with the November 2012 Memorandum of Understanding which would have involved no haircut at all. The Troika wanted Cyprus to sell the Cypriot banks’ Greek operations. But it never forced Cyprus to sell them at a loss of 3.4 billion euros. However the then governor of the Bank of Cyprus, Panicos Dimitriadis later noted that Cypriot politicians had argued that, ‘If we show our readiness to turn down their offer, the Eurogroup will come to its senses and will then offer us a better deal, as they wouldn’t want to face a disorderly unraveling of the euro.”

The Troika seems to have favored a bail-in so that all creditors would contribute to rescuing the banking sector. But it never forced Cyprus to let Bank of Cyprus customers repay the €9.6 billion that Laiki Bank owed the state. Nor did the Troika ever tell Cyprus to compensate its own Cypriot pensioners, while leaving Greek pensioners in the cold. Bail-ins may be necessary sometimes. Preferential treatment like that of bank employees union ETYK that demanded that the taxpayer compensate them for the losses suffered by their pension funds, clearly shows double standards, on the part of the government.

In essence the bail-in was discriminatory, affecting non-Cypriots much more so than Cypriots, and forcing them to pay for mistakes the government of Cyprus had made. Although, states are sometimes forced in extraordinary situations to confiscate property or money, in this case the bail-in, it must under international law still pay fair compensation.

In a paper, published in the Journal of Financial Regulation, Emilios Avgouleas and Charles Goodhart maintain that the aim to penalize Russian creditors of Cypriot banks might have played a significant role in the way that ‘rescue’ was structured. Inevitably this also affected all foreign investors. George Friedman notes that “claiming informally that Cypriot banks contained primarily Russian money meant for laundering, Germany insisted that the bail-in process should prevail.”

The bail-in disproportionately affected non-Cypriots and forced them to pay for billions of the government’s own shortages and financial obligations. And in this there lay a huge problem. The whole scheme of involving foreign creditors in the bail-in ran against the Bilateral Investment Treaties (BIT) that Cyprus had with 26 other countries, including, the USA, the UK, Greece,and Russia, as well as the DTT treaties Cyprus has with 50 other states. Clauses in said treaties would pose problems as the bail-in would constitute expropriation and would thus require “fair and equitable compensation.”

However, it seems that the government of Cyprus was well aware that it could face such problems as Dr. Constantinos Lycourgos, head of the EU law dept, at the Law Office of the Republic of Cyprus, noted the tremendous problems that could arise from the “imposition of a deposit levy” because of the such treaties, as he stated in an e-mail to troika reps on 22 March 2013, after the rejection of Plan A on March 19, 2013. Lycourgos noted that applying a haircut under Plan B “to non-residents” (e.g., Greek nationals) would be “legally problematic in a number of ways" and that “it seems highly likely” that it violates Cyprus’ Bilateral Investment Treaties, which require that an expropriatory measure like the bail-in plan be accompanied by “immediate effective and ample compensation,” as specifically the bilateral agreement with Greece clearly stipulates.

In February of 2013, the head of the governor's office of the Bank of Cyprus, George Georgiou, replying to a query from the Bar Association admits that any haircut is unconstitutional and that any attempt to deny that, violates human rights “cannot merit serious consideration.”

Furthermore, in an official Position Paper of the Cypriot Government, the Ministry of Finance conceded, in September 2013, that “it is not fair” that Laiki and Bank of Cyprus bondholders “should now suffer a haircut because of the wrong decisions” of the Cypriot Government itself, and offered to compensate bondholders by buying up their bonds for €1.9 billion and exchange them for government bonds repayable in 2018. It also opined that it would likely lose any resulting lawsuits against it anyway.

The Cyprus Investigative Commission (“Pikis Commission”) Report, September 28, 2013, was another indication that Central Bank Governor Demetriades admitted that “the Bank of Cyprus was not in need of support” and that until the sale of its Greek operations to Piraeus Bank on March 26, 2013 (and, therefore, after Demetriades and the Minister of Finance placed the Bank of Cyprus in resolution on March 25, 2013), the Bank of Cyprus was actually solvent. Mr. Demetriades admits in his recent book that he and President Anastasiades knew that the healthy Bank of Cyprus would also be put in resolution but deliberately did not tell Parliament when it was asked to urgently adopt the Resolution Law giving the Central Bank resolution powers.

Seeking redemption

Many of the Greeks that had sequestered savings in Cyprus were victimized twice: Once by the Greek Crisis and, after they were told by Cypriot banks to move their savings to Cyprus to avoid the Greek Crisis, by the Cypriot Crisis. For them, it was a betrayal by the Cypriot government. For many it was a disaster they could not rebound from as many were too old to ever earn their life savings back. Families lost their entire life savings, money for their children's education, or money for retirement as the Greek pension system collapsed, and Is still sinking.

This spurred 953 Greeks, among them 7 legal entities to try and recoup their losses through legal action. The arbitration proceeding was brought on behalf of the Greek citizens who lost funds as a result of their deposits in Laiki Bank (also known as Cyprus Popular Bank, Marfin Popular Bank or Marfin Egnatia Bank), or the Bank of Cyprus, or as a result of bonds they purchased that were issued by the Banks.

On December 15, 2017, the Firms filed a Memorial on the Merits, setting forth in nearly 200 pages, supported by almost 2,300 exhibits as well as first-hand eye-witness testimony, the evidence that counsel for claimants gathered during the course of years of investigation. The legal counsel believe this evidence provides strong support for the claimants’ position that the Cypriot government’s involvement in the expropriation violated the rights of Greek citizens under the Cyprus-Greece Bilateral Investment Treaty.

However, it has been a long drawn-out process as the counsels for the plaintiffs argue that the Cypriot side has thrown spanners in the works delaying the selection of the arbitration panel due to disapproval of candidates, among other things.

The Arbitration alleges that Cyprus violated the BIT’s expropriation provisions because the Bail-In was intentionally designed to discriminate against non-Cypriots while ensuring that its own people would pay far less than their proportionate share. In particular:

  • Cyprus knew that most depositors with more than €100.000 in the Banks were foreign, and rejected viable alternatives to the Bail-In that would have spread the burden evenly across foreigners and Cypriots;

  • the Cypriot government ensured that loans it had made to the Banks were repaid in full;
  • the Bail-In measures exempted “charities” and other institutions that benefited only Cypriot entities and citizens.
  • The effect of these discriminatory provisions was that Greeks were made to shoulder more than double their share of the burden of the financial troubles in Cyprus.

According to the plaintiffs' legal counsel addition to being discriminatory, the expropriation was also unlawful for the following reasons: investors were not given any effective means to challenge the taking of their funds; the Bail-In was grossly disproportional to the financial needs of the Banks (indeed, the Bank of Cyprus did not need to be placed into resolution at all); and adequate compensation was never provided to the victims of the expropriation.

The Arbitration also alleges that Cyprus violated the BIT’s guarantee of “fair and equitable treatment” to Greek investors, which essentially requires the Cypriot government to act in “good faith.”

The firms now seek to file a new ICSID arbitration, based on the same evidence and claims, on behalf of the thousands of other Greek citizens who lost funds in the bail-In. Find out more, and if you apply here: http://cyprusaction.gr/