Cyprus’s bailout and the haircut on deposits has hit the country hard. Although busy, the island’s law firms are also feeling the pain
It was just under a year ago that Cyprus first went to the EU to ask for a bailout after suffering heavy losses from its exposure to Greek debt.
Although the prospect of becoming the fifth member state to receive a bailout hung heavy over the island throughout the second half of 2012, the possibility of a new wave of investment in the energy sector buoyed the mood in the country. That changed overnight in March, when recently elected president Nicos Anastasiades announced agreement had been reached with the EU over the terms of a bailout.
Unlike the bailouts of other, larger economies, the EU had included an unprecedented ‘bail-in’ . Depositors faced losing up to 10 per cent of their savings in proposals to force Cypriot savers and businesses to contribute to the rescue of the country’s banking sector.
The proposals were met with shock and anger.
“We went to bed on 15 March and everything was fine,” comments Andreas Neocleous & Co corporate head Elias Neocleous.
Over the next week there was universal ou rage over the proposals. The Cypriot government negotiated with the EU to secure a different deal. In the end, those with savings of less than €100,000 (£85,000) had their deposits transferred to the Bank of Cyprus as the country’s second-largest bank, Laiki, was wound down. Those with savings of more than €100,000 lost a substantial chunk of their money.
Cyprus is still absorbing what the bailout agreement will mean for the country in the longer term, but in the short term there is no doubt the jurisdiction’s reputation has taken a hit.
“What concerns me is the bruising of the image of the country as a brand – that took a huge blow and it will take a huge effort from the government and the industry to relaunch ourselves as a credible offering for international investors,” says Pamboridis founder George Pamboridis, predicting a decline in international business of 15 to 20 per cent in the short term.
“There’s a lot of hesitation and a lot of uncertainty as to the credibility of the jurisdiction – this affects new work,” adds Stelios Americanos of Stelios Americanos & Co.
Despite all this, lawyers say the nuances of Cyprus as an international centre for business mean the restructuring of the banking system will not mean the death of the island as a financial centre.
“The reputation of the banking industry on the island has been dealt a severe blow – a lot of people lost money,” admits Neocleous, adding: “But I wouldn’t say the whole industry has been killed, the reason being that the international business industry doesn’t rely purely on banking.”
Neocleous and his counterparts in other internationally focused law firms say clients who use Cyprus as a domicile for corporate structures, investment funds and the like have not deserted the island.
“Lots of clients use Cyprus, but they have their banking assets outside Cyprus,” Neocleous explains. “These clients haven’t really been affected.”
“It’s not as if existing clients will pack up and go – we don’t have clients who have suffered huge losses,” adds Pamboridis.
Americanos comments that while clients are concerned about the bailout and its impact, the firm has not seen clients leave the jurisdiction.
How it all went wrong
Despite a statement from Anastasiades on 16 March which said: “The state of emergency and critical nature of the times do not allow me, as they do not allow anyone, to embark on a blame game,” naturally there has been a round of navel-gazing as Cypriots decide who is at fault for the crisis.
Most lawyers place the blame squarely at the doors of the previous government and Cyprus itself.
“We have to be blamed for what’s happened because we didn’t take the right measures at the right time,” admits Neocleous.
Pavlos Aristodemou, managing partner of offshore firm Harneys’ Cyprus office, agrees.
“The ones to blame are definitely the Cypriots, as we didn’t have the proper regulation in place,” he says. “It seems true that a lot of our banks made the wrong investments. The connection with the banking system in Greece has dealt a real blow to Cyprus, but it wasn’t imposed on us to make these connections. When Cypriot banks were making a profit out of Greece everybody was happy.”
Pamboridis also thinks the country itself is to blame, with the government at fault for allowing the banking sector to grow out of proportion with the economy and not keeping a tight rein on public sector spending.
According to Americanos, Cyprus’s situation is a result of a combination of factors, including the delay by the previous government in taking action over spiralling financial problems and the terms of the memorandum of understanding between Cyprus and the Troika.
Some allocate a portion of the blame to Greece for failing to manage its economy and on Europe for taking such drastic action and not supporting Cyprus in the way other countries had been supported.
“The Europeans felt Cyprus represented the perfect opportunity for them to try something revolutionary,” says Pamboridis.
“The Cypriots love Europe and we thought our partners would show some solidarity,” Neocleous adds. “We never thought we’d be punished so severely.”
Work for lawyers
As is often the case when something goes horribly wrong, larger law firms with an international outlook are keeping busy advising various parties.
Andreas Neocleous, Cyprus’s largest domestic firm, is working alongside Slaughter and May, advising the country’s Central Bank on the restructuring of the banking sector and the redrafting of banking regulations.
Harneys moved quickly to set up a group devoted to advising clients on the banking crisis. Aristodemou says the firm is advising clients such as financial institutions on their investments in Cyprus, as well as acting for those wishing to challenge the legality of the administrative act that implemented the haircut on deposits.
Americanos is also heavily involved in such litigation. His firm has filed several cases before Cyprus’s Supreme Court challenging the legality of the government decrees that implemented the haircut. The government is contending that the measures are the result of a political decision that cannot be annulled by the court, and also that the decree is an administrative decision of a regulatory, not executive, nature which again cannot be challenged by the Supreme Court.
Americanos is arguing for his firm’s clients that as the haircut affects private individuals’ human rights it should be subject to Supreme Court review and that the European Commission Crisis Management Directive allows judicial review of such decisions.
He explains that the court is deliberating on six preliminary issues. If the government wins at this stage the case will be thrown out, but Americanos says the firm will take it further.
He praises the independence of the Cypriot courts, adding: “They’ll decide the issues purely on legal grounds and set aside any political considerations.”
Americanos thinks the haircut was illegal and needs to be discussed by the courts.
“It violates every principle of law that I ever learned,” he asserts. “It’s an issue not only of ethical and legal action, but of bringing these cases before the courts to have a proper legal discussion and a decision as to whether they’re legal or not.
“If we fail at the Cypriot level our intention is to bring the cases before the European Court of Human Rights. We’re going to go all the way here.”
The firm is arguing that the decree violates various clauses of the European Convention on Human Rights, including the right to private property.
However, success would mean those who lost money would be able to claim damages against the government. Despite Cyprus’s liquidity problems Americanos says there are enough assets to compensate those who lost deposits.
“We’re not going to go back to the same situation [as before the haircut], but clients that are successful would have the right to claim damages,” he adds.
Americanos says the impact of the haircut on deposits of more than €100,000 has not only affected businesses. As an example, he cites the case of a client who had been injured in a road traffic accident and had received compensation of €800,000. Following the haircut, they have just €100,000 left.
Like Harneys, Americanos has also filed cases in the district courts based on tort and breach of contractual rights.
For the bigger firms in Cyprus the crisis has so far mainly generated work rather than caused problems. However, they are considering options to minimise the impact on their own businesses.
Pamboridis has already closed its small Limassol office, relocating the staff there to the capital Nicosia. It has also shut down its representative London office.
“We closed Limassol because we need to secure the jobs of all the people in the firm,” says Pamboridis. “We’ve not let any people go, but it’s too extravagant to have expenses which were okay for the days of the fat cows but are not now. Having the Limassol team integrated into the main office makes life easier for all of us here and cut costs a lot.”
He adds that the firm is maintaining its Athens office due to contractual obligations with clients and that work from Greece is “encouraging” at the moment.
At Andreas Neocleous, there have been no redundancies as yet, but partners have been monitoring the situation. Neocleous says partners discussed the issue at a recent meeting and resolved to keep their options open.
“The consensus was that we don’t have to do any downsizing because of the crisis, but we may have to do a restructuring because of the way the general business moves in this environment,” he says.
Indeed, 2012 for Andreas Neocleous was not a bad year, with revenue at Cyprus’s largest firm remaining stable at €28.5m.
Everyone in Cyprus now wants to move forward, and lawyers feel they have a role to play in promoting the island to clients as a safe and stable jurisdiction.
“In terms of corporate structuring and so on we’re confident that despite what’s happened Cyprus remains an attractive jurisdiction,” says Aristodemou.
“There’s a silver lining in the sense that the product Cyprus was selling was ageing,” Pamboridis says. “It was something we came up with in the 80s and we needed to refresh it. This situation has forced us to sit down and rethink what Cyprus stands for, what we’re selling and what is the competitive advantage of Cyprus as an international business centre.”
He calls for speedy action by both the government and the industry to get out a positive message.
Americanos is also fairly upbeat. “Things look positive, especially taking into account the magnitude of the damage,” he notes.
However, nothing is likely to change quickly and the immediate outlook remains gloomy.
“We’re going to see lots of foreclosures and unemployment will be going up,” Neocleous predicts. “It’ll only be in 2015 that the economy will start turning around.”
“I see a prosperous future, but it will be quite a bumpy road ahead,” concludes Aristodemou.
Countdown to chaos
26 October 2011
Greek haircut on sovereign bonds costs the Bank of Cyprus and Laiki Bank €4.5bn
25 June 2012
Cypriot government asks the EU for a bailout, citing exposure to the Greek economy as a reason for the country’s financial troubles
23 November 2012
EU reports that it has reached a preliminary agreement with Cyprus over the terms of a bailout
17 February 2013
Lawyer Nicos Anastasiades (pictured) wins the presidential election after incumbent Demetris Christofias decides not to seek re-election
16 March 2013
Anastasiades announces agreement with the EU over bailout terms. Controversially, the agreement includes a 10 per cent levy on deposits in Cypriot banks
19 March 2013
A week of bank holidays begins as the government goes into urgent talks with the EU and close relationship partners such as Russia in an effort to strike a better deal
25 March 2013
A €10bn rescue plan is agreed, safeguarding deposits under €100,000. Laiki Bank will be wound down and deposits over €100,000 used to resolve debts and recapitalise the Bank of Cyprus. Deposits of less than €100,000 are transferred to the Bank of Cyprus
28 March 2013
The country’s banks reopen
2 April 2013
Finance minister Michalis Sarris resigns. Memorandum of Understanding with the Troika agreed
30 April 2013
Cypriot parliament approves EU loan agreement
15 May 2013
IMF approves €1bn three-year loan to Cyprus, the first batch of funding
Key figures: Cyprus
Inflation (Apr 2013): -0.3%
Population (2011): 1.1m
Life expectancy at birth: 80
Unemployment (Dec 2012): 12.7%
Source: World Bank, Cyprus Statistical Service