Demetriades on political pressures on central banks and their governors

Former governor speaks on Cypriot banking crisis and his fears for euro stability

Cypriot banks pre-crisis offered high levels of interest on deposits, and then embarked on risky overseas expansion, and invested in property developments and high-risk Greek government bonds – their holdings were larger than Cypriot government bonds. Did you find out why banking supervisors permitted such large investments in risky Greek assets?

I tried to find out how that happened. According to Basel rules, you could switch from German bonds to Greek government bonds, and you didn’t really need to hold more capital – so it was regulatory arbitrage. The central bank did try to ask the banks to hold more capital, but it didn’t go as far as to stop them, to say: “No, you can’t have 100% of your own capital in Greek government bonds.” Which, with hindsight, is what they should have done. But no-one knew at the time that this [80% haircut on Greek bonds] was going to happen. My predecessor has gone on the record saying that he wasn’t expecting the Greek debt writedown, the Greek PSI (private-sector involvement), to happen. So that must be the reason.

So there was a strong expectation that there wouldn’t be a writedown?


You have stated that some Cypriot law firms, connected to the banks and to local politicians – who backed the banks, it seems, throughout the crisis – acted as introducers to wealthy Russian clients, and received commissions for this work. Was this interconnectedness one of the root causes of the problem?

This goes to the heart of the crisis, really, because the banking system doubled in size in terms of the balance sheet in less than six years. Soon after Cyprus joined the European Union, there was an influx of money, and a lot of it was from Russia and also from the other former Soviet republics, especially Ukraine. So they aggressively went out to get Russian business, not just deposits in the banks, but business generally – helping to set up companies and helping them in terms of whatever disputes they had. Even today, a lot of disputes among Russians are resolved in the Cypriot courts. It was good business for the lawyers, obviously, but with it, we had a lot of negative consequences for the country, including the build-up of systemic risk.

Were you surprised that Cyprus Popular Bank (or Laïki) and Bank of Cyprus passed the European Central Bank’s 2011 stress tests, even though they were required to raise additional capital?

Yes and no – because they only passed them very marginally, and they had already lost money from the Greek PSI, so it wasn’t surprising that they passed marginally. The claim earlier was that they had a lot of capital, but obviously the Greek PSI wiped much of that capital out. So it was a marginal pass, and they were asked to raise capital. And although they said initially that they were very confident they were going to raise it, they both failed in the end. And that’s in the end why Cyprus had to apply for a bailout from the International Monetary Fund and Europe.

You described Jörg Asmussen – the ECB’s main ‘troika’ official and a member of its board (2012–13) – as late, curt and only really interested in why Russians were investing in Cyprus at your first meeting with him. Do you believe Asmussen was playing German politics, rather than trying to find a true solution for Cyprus?

Jörg Asmussen was a politician, and is a politician. His time on the board of the ECB was a short one. He left to become a state under-secretary for labour in the [German] coalition government. So that was part of his character. Nevertheless, he was always professional in all his dealings. But it seems that Germany was worried about Russian deposits from that point, even before Cyprus applied [for troika assistance]. That came through later in the autumn of 2012 in the German popular press, which started criticising Angela Merkel for planning to bail out Russian oligarchs who had deposited their money in Cyprus. So maybe there were some political discussions at the time. Maybe that’s why he was so concerned about that already from June 2012.

L to R Christopher Jeffery Panicos Demetriades
L to R: Central Banking’s Christopher Jeffery with Panicos Demetriades

But he was professional in his ECB work?

Absolutely. He was always professional, maybe a bit blunt in the way he expressed himself. And that came through when the negotiations with the new government of Cyprus, later on in March 2013, when the newly elected president, Nicos Anastasiades, said that Asmussen “put a gun to his head” to accept the deposit haircut, as he called it.

Was Asmussen correct to threaten to cut off ECB emergency liquidity assistance (ELA) at that time?

In accordance to the rules of the ECB, you cannot really provide liquidity to an insolvent bank. The ECB was supplying liquidity to the Cypriot banks on the expectation there was a backstop, and the backstop was going to be the EU and IMF bailout. If Cyprus didn’t have a programme, then the ECB could not continue supplying liquidity. I tried to explain that in Cyprus many times. But people saw it as blackmail by the ECB. And, of course, because it was Asmussen who was there, they tended to blame him. But in effect, he was just explaining the rules of the Eurosystem.

President Anastasiades appeared to demonise the provision of €9 billion of ELA to Laïki. Yet you have said that when he was in opposition, he threatened you as governor with criminal charges if ELA wasn’t provided to Laïki. Is that correct?

Yes, indeed.

Were you surprised about this turn of events, especially the subsequent police investigation?

ELA was politicised in Cyprus from the beginning to the end. And Anastasiades had promised there would be no deposit haircut days before the elections because there was news coming out that one of the solutions that was being talked about involved bailing in depositors. So he came out as a presidential candidate and said: “No, I guarantee there will be no haircut.” So, clearly, his own credibility was at stake. It was, in some sense, politically convenient for him to blame the ECB, to say it had put a weapon to his head. That’s how Asmussen came into the story. Once it was accepted that there had to be some form of bail-in, they needed someone to blame, so the blame game started: So it was the ECB that threatened, but also it was the Central Bank of Cyprus that provided the ELA. So, in one sense, many people in Cyprus thought I provided the ECB with the weapon of blackmail, so I must be guilty as charged. But it was still a shock to see that the police started investigating it to see if there was some wrongdoing there. There was absolutely nothing there – at least, as far as I could tell. It was largely a political investigation that came to nowhere in the end.

Why was there so little trust in Cyprus of the diagnostic exercise and capital shortfall estimates carried out by Pimco? Do you have some sympathy for some people’s view that Pimco is not an expert on Cypriot loans?

Pimco is a big US asset management company. It was criticised that it did not have the expertise. But the diagnostic and due diligence exercise involved hundreds of meetings with the participating institutions, and involved a lot of meetings with the steering committee – which didn’t just include the central bank, but also the ministry of finance, the IMF, the ECB, the European Banking Authority, the European Stability Mechanism and the European Commission [EC]. So all the expertise was there, and they challenged Pimco, and basically tested the whole process. Ultimately, Pimco came up with its own estimates, which were criticised by Cypriot bankers, mainly, and their political backers, who said: “Oh, this is an exaggeration.” Clearly, they had a conflict there because once the losses were known, they had some responsibility in that. So they had every reason to do that from their own point of view. But what happened afterwards, when the ECB carried out stress tests as part of the Single Supervisory Mechanism, it found that there was a shortfall. And that was only a few months afterwards. For Bank of Cyprus and Laïki, because they were already merged, they needed another €1 billion [$1.2 billion] to pass the SSM stress tests. So, if anything, the Pimco diagnostic exercise underestimated slightly. There was only a few months’ difference between the two exercises, one was in the middle of 2012 and one was at the end, I believe.

Who called for insured depositor funds as part of an initial Eurogroup-approved ‘bank deposit levy’ proposal – something described by Russian president Vladimir Putin as “unjust, unprofessional and dangerous” and by then British prime minister David Cameron as “a complete mistake” – to bail out the banks?

I was shocked when I found out about it because I was completely in the dark that this was even being discussed. I learnt from the media that this was agreed by the Eurogroup. The first thing I did was to call [ECB president] Mario Draghi and Olli Rehn, who was at the time the European Commissioner for Economic and Monetary Affairs, and they both told me the same story – “It was your government’s idea” – so, the Cypriot government’s idea. That was the way it came about, it seems, although Anastasiades initially distanced himself from it, but more lately has said that this was a better solution than the bail-in (he and his former finance minister insists that this would have been a better solution because it spreads the pain evenly).

It transpired the reason the Cypriot government did that was that they wanted to protect the business model, and particularly the really wealthy clients

Panicos Demetriades

But in terms of economic incentives, it was completely wrong. And in terms of deposit protection – the basis of confidence in the banking system – it was wrong. So what Rehn and Draghi said was that it was the Cypriot government that insisted on it. “But we can change that,” they said. “We can go back to a situation that protects insured deposits.” Which I was very keen on because we couldn’t really rebuild confidence without it. It transpired the reason the Cypriot government did that was that they wanted to protect the business model, and particularly the really wealthy clients. It transpired that they consulted with some trusted wealthy clients, and they said they would be willing to contribute no more than 10%. But that wasn’t enough to cover the shortfall, so that’s why they had to tax insured deposits, and they had to tax insured deposits even in healthy banks.

Why did the Eurogroup accept it?

That’s a good question. The only answer I got was that it was 4am in the morning, and they got tired. And apparently, [then German finance minister Wolfgang] Schäuble at the time said: “Well, if you want to destroy your banking system, then do it.” 

Despite the potential to damage the eurozone?

Yes. That is when they realised that Cyprus was systemic after all. Then they realised it was a mistake, and they tried to take it back. And they said, there is a new teleconference with the Eurogroup on the next Monday, in which they called on the Cypriot authorities to exclude insured deposits from the tax. But even then, even after that happened, I went to parliament and I said: “Yes, do that. Exclude insured deposits.” But the then minister of finance said: “We will exclude the first €20,000.” But it didn’t go all the way to the €100,000.

So how did that situation end up being changed so that insurer depositors were protected?

What happened was that parliament decided there would be no deposit levy whatsoever. They thought – this is, in fact, where political and fake narratives actually make a difference for the better, but for the wrong reasons – the banks were healthy, and this was just punishment from Europe. And all Cyprus needed to do is just say “no” to them and then they would change their mind and there would be no deposit levy. But the problem did not go away. They turned it down, and then we had to do the right thing, because after that experience, the Eurogroup and, at the technical level, the troika said: “This is your only choice. The choice is bailing in depositors at the banks that need to be resolved not everywhere in the system.” And it was take it or leave it after that.

Can you explain what the objections were from the Greek Orthodox Church of Cyprus, which held a large equity stake in Bank of Cyprus – which was viewed as a little stronger than Laïki?

Yes. It was slightly stronger than Laïki, but they both had similar problems, basically. What happened was that Laïki had more problems in Greece, and Bank of Cyprus had more problems in Cyprus, which is quite interesting, given their ownership structures. Laïki was owned by a Greek shareholder, the oligarch Andreas Vgenopoulos. But Bank of Cyprus was owned by people in Cyprus. Its board was very Cypriot-centric, and lending also was very Cypriot-centric and also very much to developers, some of them were connected to the church. The church was the biggest shareholder in Cyprus, so they objected to their shares being wiped out. That was their main objection. And it was quite strange that they were happy with deposits being bailed in, but not their shares being wiped out. I tried to explain that to them, but it was very difficult. They objected, and managed to obtain a court injunction that could have stopped us from reopening the banks – if we had ignored that court injunction and reopened the banks after bailing in the church, I think the first thing that would have happened the next morning would have been the police would have arrived at the central bank and arrested me for contempt of court. So the lawyers who were advising us – we had a lot of good lawyers, central bank lawyers, and also a lot of British lawyers from top UK law firms – said we shouldn’t do that. And, reluctantly, we agreed with the church’s lawyers, to allow them to have a tiny fraction of the new bank. And that was all they needed. They thought they would have some claim just by being there, although they were completely diluted. But nevertheless, that wasn’t completely clean. The EC wasn’t happy with that, and I can see why, but it was the only way I could reopen the banks after the maybe 10- or 12-day bank holiday.

Why do you feel the government was wrong to push back on the Alvarez & Marsal estimates of a 22.5% bail-in, which resulted in a 47.5% total bail-in? And then this firm also sought a hefty fee – which people objected to – without apparently the board’s knowledge.

The fees were another issue. They never got paid the hefty fees for that. I think they withdrew their demands on that. But on the issue of the bail-in, it wasn’t just Alvarez & Marsal, this was tested by the EC, the ECB itself, etc. There was an agreement with the Eurogroup that the Bank of Cyprus would have a 9% core Tier 1 ratio at the end of the programme, not at the beginning. So it had to use projections, and there had to be enough capital upfront to make sure there was no need for any public money during the programme. That was a condition of the programme. So we had to err on the side of caution – and, in fact, in the end, the bank needed to raise more capital later on. But it was clear that the ECB governing council wasn’t going to accept anything less than that in terms of reinstating the bank as a counterparty for monetary policy operations. We got a very clear signal from the member of the troika who was representing the ECB, that the executive board would not be able to support this if we didn’t basically do that. That was the minimum we could get away with in some sense. I tried to explain that to the government, but I don’t think they wanted to know. Or maybe what they did want was to show that they were pushing the other way. That’s how I interpreted it. To show to the wealthy Russian clients and whoever else: “We are fighting this, we are resisting this. And it’s only the central bank that is going along with it.” I think that was the kind of political game that was being played at the time. And they probably knew that this was the minimum amount that was necessary, but they said: “Well, it’s your legal responsibility: you make the decisions, but we are going to criticise you.”

Why do you think that the 20-year veteran, former Central Bank of Cyprus governor Afxentis Afxentiou protested about you allowing deposits to be wiped out of Bank of Cyprus and failing to protect the banks from the troika?

Well, I have a lot of respect for Mr Afxentiou because he was a governor for 20 years and he appointed me to be an economist in the central bank very, very early on. So we had that good relationship. He came and told me that. But he did admit he was one of the depositors that were bailed in. So he had an obvious conflict of interest. He and his family had deposits in Bank of Cyprus, like a lot of middle-class wealthy people in Cyprus – it wasn’t just the Russians who were bailed in – and felt strongly that they would have preferred the deposit levy that the government initially proposed.


Panicos Demetriades is a professor of financial economics at the University of Leicester. He was governor of the Central Bank of Cyprus and a member of the governing council of the European Central Bank from May 2012 to April 2014.

Demetriades began his career in the economic research department at the Central Bank of Cyprus, leaving the central bank in 1990 to join the Department of Economics at Keele University. In 1997, he left Keele to join South Bank University as a professor of financial economics before moving to his current role at the University of Leicester in 2000. Demetriades gained his bachelors and masters degrees in economics at the University of Essex and his PhD at Cambridge University, where he won the Stevenson Prize in Economics.

Demetriades is author of the book A diary of the euro crisis in Cyprus: lessons for bank recovery and resolution.

So you don’t think there was a philosophical difference due to the central bank being more clearly part of the government during Afxentiou’s time, whereas in your day, with the Treaty on the Functioning of the EU, it was more independent?

Yes, there was some aspect of that, and there were some other discussions with him later on. When he was governor, there was no independence whatsoever – the president could just dismiss the governor at will, yet he outlasted, I believe, three presidents. That had never happened before while the central bank was not independent. But he clearly went along with the flow. There’s no other way to survive as a governor if the central bank is not independent if you don’t go with the flow. And I truly believed in the idea of central bank independence, and I did what I thought was right at various points, and that meant some conflict with the government every now and then.

Do you think when you see how Italy seems to have carved out certain provisions and pushed back on some of the non-performing loan problems with its banks that in hindsight you could have fought for a better deal for Cyprus?

Well, the better deal for Cyprus could have come from the government itself if they questioned the IMF’s debt sustainability analysis, but they never did that. The debt sustainability analysis used a parameter of 100% of debt-to-GDP ratio. That was cautious. And I argued with the IMF on that. I said: “If you allow us to 120%, like you did with Greece, 20% of GDP for Cyprus is $3.86 billion. It’s a lot of money and it would have reduced the bail-in.” Because I feared that as the bail-in was so high there was going to be a lot of toxic fallout – as there was. If only we could get a little bit more bailout, we would have minimised the bail-in. But, of course, that meant that the taxpayer would have to pay: there is no free lunch.

So the government didn’t press for that?

They didn’t. In those early days, they didn’t even ask for our advice. They went to the Eurogroup without talking to us, and that’s why I was shocked when this deposit levy came out. If they had asked, we would have said the way to address this is not through saying “no, I don’t want bail-in, but I want a broad-based deposit levy”, but it was to go back to the assumptions of their debt sustainability analysis and challenge the public finance aspects of those assumptions. I dare say that probably might not have succeeded because the IMF felt very strongly that it didn’t “want another Greece on its hands”. It was already being criticised for getting it wrong in Greece, so they wanted to err on the side of caution with their analysis. But the government could have tried – and, as far as I know, they didn’t.

An investigation under your watch found that some credit-contingent convertible (CoCo) bonds had been miss sold to investors. Were they ever compensated?

Some investors were advised to go to court, and some court decisions are going in their favour because there was an investigation that found – in some cases, not all – that banks mis-sold CoCos. It has to be judged on a case-by-case basis, so people who feel that they have been misled should go to court and try to seek compensation. The Bank of Cyprus is still in existence. The question mark is: if it was Laïki that sold the CoCos, would Bank of Cyprus honour a decision made by the courts? I don’t know if that would happen.

Another effort you undertook to clean up the Cypriot financial system was changing anti-money laundering (AML) measures. What specific recommendations were made? And what was enshrined into law?

The legal framework had to change, and that came from the troika largely, and from the IMF. We also received technical assistance from the IMF to strengthen our AML capabilities at the central bank because, initially, the resources we had were very limited. And although our framework was as good as the rest of Europe, the implementation left a lot to be desired. There was an effort to improve and to have a risk-based AML framework that would also involve a lot of spot checks, etc. That has I believe, happened – perhaps not to the full extent that I may have liked when I was governor, but certainly there has been movement in that direction.

Does the central bank have appropriate staffing now?

I’m not sure what staffing they have now. But I do remember that the IMF recommended that we should increase staffing by quite a considerable number. And I remember having discussions with the board in which they were more concerned about public money, rather than about the image of Cyprus. I was trying to push the notion that if the IMF thinks we should have ‘x’ number, we should go all the way, but they wanted to be more cautious with public money. They thought what the IMF was suggesting was excessive.

Were you surprised to see these allegations of large payments made regarding Cypriot entities in relation to the Paul Manafort trial in the US?

I was shocked because there was a payment in 2014 for $900,000 and another one in 2015 for $1 million. That really shouldn’t go unnoticed under any AML radar in any well-managed bank. I was really shocked that those had gone through. And, especially, we learned that Paul Manafort had his account with Laïki to start with, and we learned initially that they were closed in 2012, and I thought: “Yes, that’s good.” I was really pleased to hear that. It seemed like the changes we were making were beginning to work. But then I found out, when I looked at the indictment of Paul Manafort, that there were these two payments in 2014 and 2015, which seemed to indicate the accounts were not closed. Maybe he had a lot of accounts and some of them were closed, but certainly there was an active account in 2014 and 2015 through which he made those two payments. And then in 2015, they closed the account finally because they realised he was a politically exposed person doing political campaigns and all the rest of it.

Were you surprised about the objections raised to having Sophocles Michaelides as the interim chairman of Bank of Cyprus? And did you have concerns about the subsequent appointment of Vladimir Strzhalkovsky, the Russian oligarch, as vice-chairman of Bank of Cyprus?

Let’s start with Sophocles, who was chairman of Bank of Cyprus during the time that the bank was under resolution. During that time, the resolution authority was the Central Bank of Cyprus, so, legally, the central bank had the responsibility and the duty to make those appointments. We chose Sophocles partly because we knew him very well and we trusted him. He was a former senior director of the Central Bank of Cyprus, with a very long service at the central bank. The idea was to have people that would protect the assets of the bank and would stabilise it. It wasn’t going to do any commercial lending activities at that time. The bank stayed under resolution for roughly 100 days. The government wanted someone else, and I basically had to say “no”. They were not happy with Sophocles – they wanted someone else, as well as some other members of the board who we also had appointed. Well, it didn’t happen. So they felt that they were not getting their way, which I thought was wrong, anyway, because they had no right at that point to be trying to exert political influence on the bank. That was part of the problem, not part of the solution, in Cyprus. There was too much political influence in the banks.

What about Strzhalkovsky’s appointment?

When the bank came out of resolution, they had already changed the resolution law, and the central bank became a minority [party] in the resolution authority. So the government already controlled the resolution authority. Through that, they controlled the Laïki bad bank, the biggest shareholder in the new Bank of Cyprus, as a result of all the restructuring and the merger. This meant the government could send the director-general of the ministry of finance to the AGM and say: “These are our people.” And that list was one they agreed with political parties, the church and the law firms that represented the Russian and Ukrainian wealthy individuals who found themselves to be shareholders after the bail-in. They had already decided it. The vice-chairman of the bank became one well-known Russian, Vladimir Strzhalkovsky, who is I believe is the former CEO of Norilsk Nickel, and I believe according to a Financial Times article, he was a close ally of Mr Putin from their time at the KGB. And we learned later that the same individual was a client of the law firm that belonged to the family of the president of Cyprus. So that was a bit of a shock.

Strzhalkovsky was there for a while, and then along came US investor (and now secretary of commerce) Wilbur Ross – after your governorship. Do you know what happened there? Do you believe that the directors managing the bank now are fit and proper for its long-term stability?

It is very difficult to answer that, and I am not sure I should. But we can sort of speculate. What happened was that in 2014, soon after I left, it was clear that the bank needed to raise more capital to pass the ECB stress test – although we allegedly had inflated the capital needs through the Pimco exercise, it wasn’t enough for the bank to pass the stress tests, and they needed €1billion more in capital. Then Wilbur Ross came in with a group of investors with the €1 billion. What happened soon after that was that some of the Russians sold out to another Russian, Viktor Vekselberg, who became one of the major shareholders. So, at the same time, we have one Russian and one American becoming the major shareholders. I don’t know if that’s a coincidence. But it is true that one of them is allegedly close to Mr Putin, and the other one is allegedly close to [US president] Mr [Donald] Trump – well, he’s now his US commerce secretary. It may be just a coincidence, there may be more to it than that. If you start thinking about who nominated the new chairman of the bank and who the new chairman was working for, you might actually come to the conclusion that this was not a coincidence.

What was behind the decision to remove the Central Bank of Cyprus deputy governor, Spyros Stavrinakis, due to him not being a Turkish Cypriot? Why didn’t any of the then board object?

The board was not very happy when the deputy governor, Spyros Stavrinakis, was removed – they thought maybe they should do this or that and asked me to consult with the ECB. But they realised that this was very political. And within days – we called another board meeting for a week later to discuss precisely this issue – they clearly didn’t want to be in this political row with the government, and they resigned. I was left without a board, and that continued for a few months, and also without the deputy governor, who was the most experienced supervisor in the bank. Before my time, Stavrinakis was the one who raised concerns about risks in the banking system. But people just didn’t want to listen to him. So Stavrinakis was removed, and I think that was the first attack on the independence of the central bank.

Before my time, Stavrinakis was the one who raised concerns about risks in the banking system. But people just didn’t want to listen to him. So Stavrinakis was removed, and I think that was the first attack on the independence of the central bank

Panicos Demetriades

Politically, it was done perhaps cunningly by saying that he’s not a Turkish Cypriot – of course he isn’t. And Europe, when they learned about this, immediately they started to say: “Well, we don’t want to deal with this. It’s too political.” But the truth was that in all other positions under the 1960 constitution, which protected roles for Turkish Cypriots, there were no Turkish Cypriots available to fill them, as the Turkish Cypriots withdrew from government in Cyprus in 1963. So for the state to function – there had to be a deputy chief of police and a deputy attorney general – these roles were given to Greek Cypriots. So why not, in the middle of a crisis, have a deputy governor who is a Greek Cypriot to stand in for the governor when the governor is in Frankfurt or travelling or whatever? It was an effort to gradually exert more control over the central bank. The next step was another change of the law, which was even more important than the change of resolution law. When the Central Bank of Cyprus Bill was changed, the government was able to appoint two executive directors without clear duties or reporting lines. They did that, even though there was an ECB legal opinion saying: “No – this suggested change in law is not appropriate. It would undermine the independence of the governor, it would undermine and erode the decision-making structures within the central bank.” They nevertheless did that.

There didn’t seem to be an accepted norm by the government or the president to respect central bank independence. Do you think you did enough to resist government interference?

Well, I tried to do as much as I could, given the climate. And in private conversations, I was always standing up to the president. I was saying: “I’m sorry, sir – with due respect, the central bank is independent, and you have to respect that and you shouldn’t interfere.” But his reaction was even stronger, and he was basically getting angry with me. There were occasions where he just shouted at me when I said that. He was saying: “Well, if you don’t follow government policies, quote, unquote: ‘I will find a way to remove you.’” So it was a very, very difficult relationship, and it only improved when I said to him: “Yes, I will go.” Then he was very happy. 

In the end, there were problems in quite a few areas. What was the main reason you decided to leave?

Well, partly it was due to the law being changed resulting in two executive directors reporting to the board. We tried initially, by involving staff and senior directors of the central bank, to propose a structure that could work – even given the problematic new law. But the board rejected it, and said: “No – they can interfere anywhere in the central bank. One of them has half the bank, and the other one has the other half of the bank.” And they would deal directly with the board and not with the governor. That’s not a structure that could work under any circumstances. The staff had divided loyalties. I was beginning to lose control of the central bank because these executive directors were there all the time and I wasn’t. And they were interfering in absolutely everything. My position was becoming rapidly untenable. On top of that were personal problems to do with the fact that I had to move my family out of Cyprus at the peak of the crisis because there were death threats to my family and to myself. After about a year without a family, I decided to go back to the UK. But it wasn’t just due to the personal reasons, and even the personal reasons were ultimately caused by the crisis itself.

In your resignation letter, you stated personal reasons and difficulty working with the board were the reasons for it. Obviously, it was a precarious time for Cyprus, but do you think in hindsight you should have been more open about the reasons? I believe you have subsequently stated that the Central Bank of Cyprus was perceived as an “enemy of the state”.

Indeed. And, clearly, on a day-to-day basis, my problem was working with a board that had more interest pleasing the government than to do what I felt was right for the banking system and the central bank. So it was true what I said in that letter. I didn’t want to say that behind all this was political interference, which, of course, there was. I tried basically to make it as low-key as possible because Cyprus was still recovering. And my first priority was not to cause a lot of questions or issues for Cyprus. I put the country first and tried to keep as low-profile as possible, and said very little at the time that would suggest that the government was basically interfering all the time in all those decisions. But that was the reality. And the board was playing that role.

Where was the ECB in all of this? You mentioned some early communication from Draghi about government actions undermining the central bank. Then, in November 2013, you said he wrote a letter to the EC president, José Manuel Barroso, about the governing council’s concerns, urging Barroso to “take all the actions necessary” to “ensure compliance in practice” with “the letter and the spirit of the treaty” and regarding “central bank independence” in Cyprus.

That’s all true, of course. I have to say that the reason I lasted for a year under those conditions was partly due to the ECB. From early on in March 2013, when there were all these attacks against me, the crisis happened and they were blaming the central bank – not the banks. It was as if we caused the crisis. And by doing lender-of-last-resort, the ELA came under criticism – rather than the mismanagement and poor asset quality of the banks or the inflows that made the banks too big to save. Early on, when parliament started discussing the notion that they wanted me out, Draghi sent a letter to parliament and to the president reminding them that they had to respect the independence of the central bank – there has to be a process [for governor removal] that is subject to a European court agreement. So they backed off after that for a while. Then they came back with a vengeance, and there was another response by Mario Draghi. Then, of course, there was the legal opinion, which was very strongly worded. There was the expectation in the ECB and the governing council that people would read that legal opinion and say: “Wow, we really need to be cautious with that.” No, they didn’t – they just ignored it! They thought that they could just ignore it, and they did.

The ECB has no legal power to do anything – it’s the EC that should protect the independence of the central bank. And eventually, Mario Draghi – maybe it was too late in November 2013 to write that letter, but at that stage the governing council was clearly incensed by what was happening in Cyprus – wrote that letter to Barroso, saying Barroso had to take action. But, instead, Barroso decided to have a ‘quiet word’ with the president and also send me a messenger from the EC to ask me to keep quiet and not say anything about the president in public. That really was completely ineffective. The ECB was asking for legal action, it wasn’t asking for a quiet word.

Why do you think Barroso was so weak on that?

I can only speculate on that. But I suspect the fact that they both, Mr Anastasiades and Barroso, belong to the same political grouping in Europe, the European People’s Party, may have had something to do with it. But that’s just speculation.

Do you believe there has been a negative impact on the credibility of the ECB’s opinions, given they are not followed through by the EC?

Yes. I think there is. At the end of the day, they published something in which infringements of independence are named and shamed. But we have to recognise with politicians in this day and age – generally internationally, and with populist politicians in particular – they just shrug their shoulders and get on with it.

Do you believe the EC’s inability to draw a line under what was going on in Cyprus has emboldened others and this, in turn, is having some serious negative impact on central bank independence?

That’s absolutely right, and that is systemic. People may have thought it was just Cyprus, it won’t happen anywhere else. But, unfortunately, it has happened. It happened in Slovenia, soon after Cyprus, when the Slovenian central bank governor had to take action on a number of banks. He found himself in all kinds of trouble and police investigations, etc. While I don’t know enough about the details, I do know that in the end he had to also step down. After that, we had the case of Latvia where governor Ilmārs Rimšēvičs effectively was removed from office without due process. Although it’s a very different case – there are allegations of corruption there that I don’t know if they are true or not – nevertheless, what we can see is that there has been no due process. One judge decided that Rimšēvičs couldn’t go back to his job, and effectively, he hasn’t been back to his job for several months, and this could be until the end of his term. Governments have found a way to remove governors of central banks without following due process, and this was supposed to be protected by the EU Treaty (Statute of the European System of Central Banks and the Treaty on the Functioning of the EU).

A diary of the euro crisis in Cyprus

Don’t you think the creation of the banking union and the SSM have addressed some of the major issues?

Absolutely. And I was one of the proponents in the early stages. My own view was that large banking systems in small states are very hard to regulate by the national supervisors, and that’s partly why what happened in Cyprus happened – because it was a very large banking system in a small country, where it was very difficult for the central bank to do the right thing. My predecessor did try, on one occasion, at least, to introduce macro-prudential measures, and there was enormous political backlash against the central bank. So it was easy to just do nothing. And that’s why creating the SSM was important. It wasn’t just to break the loop between the sovereign and the banks – the ‘doom loop’ – which I’m not sure it has done, but it was to break the link between the national supervisor and the national banking system. And that has happened to a large degree – except for AML, which, surprisingly, remains in the hands of member states. So some of those things that reinforce some of these problems that can occur on a national scale are still there potentially for AML. If AML remains under the thumb of the politicians, which are increasingly becoming populists everywhere in the world, you can appreciate that the right actions may not be taken. If they are able to exert enough pressure, you may get the wrong actions, you may get banks being scapegoated, or you may get ‘turning a blind eye’ when big things happen. That’s wrong. Security risks in this day and age have a common source. The whole of Europe is subject to one very big security risk. But I would leave it at that.

Do you believe the ECB’s own independence has fundamentally been damaged by ‘whatever it takes’, its role in the troika, conflicts potentially with the SSM – essentially due to the eurozone crisis?

There is certainly a hypothesis there that needs to be explored further, and I’m actually doing that in my next book. I’m writing about the erosion of independence, particularly of the ECB through all these episodes, and what it means for the future of the euro – because, ultimately, the independence of the ECB is what protects the monetary union. If that’s eroded, then that monetary union becomes shaky. It doesn’t have a strong foundation. I fear that’s the way we’re going.

You’ve also stated that independence is not just related to the monetary policy side – is that correct?

Among the core principles of the Basel Committee for Banking Supervision, the key principle is the independence of supervisors. Now, when you look at the treaty, however, the independence of the ECB is motivated by monetary policy considerations. No doubt about it. When they wrote the treaty, people didn’t think the ECB would have banking supervision responsibilities. The treaty was written with monetary policy in mind. But now the ECB is taking on all these additional roles including supervision. It seems to me that the independence protection there is much more limited. It’s a fuzzy area that has not been legally tested. Partly because of that, the construct needs strengthening. But whether you can change the treaty? It’s difficult for sure to get all the countries to agree.

Given you had the support of the ECB and the treaty when you were the governor of the Central Bank of Cyprus, and yet you still struggled to perform your job unmolested, how much chance is there for other central bankers to have independence in countries that don’t have those protections?

Actually, even with the treaty, people say that it is protecting Eurosystem central banks, but it only protects the governor. It’s not protecting the boards, it’s not protecting the staff, and it’s not protecting the institution in the same way. One of the members of the board told me this when I was governor: “Well, you’re the governor. You’re like a pilot, and when you’re in the sky, you’re completely in control. But we control the fuel, so you may never take off.” It is a humorous and tragic way to put it. It’s not enough. But in this day and age, where legitimacy issues and accountability issues are also there, it’s not easy to suggest to the general public that we want more independence for the central banks. So anything that happens has to go with increased accountability. But I don’t think that the current levels of independence offer enough protection, even in Europe where the monetary union is at stake, but also in other countries where there is not even that protection. And, of course, we’ve seen in African countries and elsewhere how easy it is to remove central bank governors.

So that is not very positive for central bank independence, based on your experiences?

No. Especially in this day and age. And part of it has to do with the rise of populist politics. Unless that is contained, the future of central bank independence is really at risk.

The text version of the studio interview with Panicos Demetriades on August 21, 2018, contains some light editing. Requests for comments from Nicos Anastasiades, José Manuel Barroso and the ECB went unanswered.

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