Michalis Sarris - Chairman, Cyprus Popular Bank HARDtalk

-- 70s hits. Now it is time for HARDtalk.

Greece appears to be inching closer to the eurozone exit door. If the

Greeks leave, how far could the contagion spread? One country which

could soon find itself in the eye of a financial storm is Cyprus,

where the banks are paying a heavy price for their investment in

Sarris, chairman of the Cyprus Popular Bank, and former minister

of finance. A mountain of banking debt, an angry public, a weaker

government, could Cyprus be the next domino to fall in the eurozone

crisis? Welcome to HARDtalk. Thank you very

much. As you watch the speculation about a quick exit from the

eurozone intensified, do you have a growing sense of alarm in Cyprus?

Absolutely. We are heavily exposed to the Greek economy. We have

already paid a heavy price for an investment in bricks sovereign debt.

More than any other country. -- in Greece. Our Bank has suffered a

loss of 2 billion euros. It is the capital that we are looking for in

order to go back to the 9%. In addition to that, we are looking at

the possibility that the large portfolio that we have been Greece

could become doubtful. It could create problems for us. As we tried

to rebuild our capital base, and as we tried to reassure our investors

that there are ways to insulate ourselves from the possible

outcomes of a deterioration in the Greek situation, we are hopeful

that we will be able to overcome. want to deal with the problems in

your bank's balance sheet in a moment. But let's stick with Greece.

Do you believe that a Greek exit from the eurozone is inevitable?

Perhaps not. But it is a clear possibility. I think the Europeans

are quite firm that they need Greece to stick to the adjustment

plan, tough as it is. On the other side, the Greeks seem to think

there is a way to stay in the eurozone without implementing the

measures that they have to in exchange for the support that they

are getting from the Europeans. Unless somebody blinks, this is the

kind of situation that could lead to an unpleasant outcome. Though

Greece has a history of going to the brink of disaster and then

pulling back. So somehow I believe that they will find a way to stay

with the eurozone, perhaps make some changes to this programme that

has been agreed to, in ways that the result can still be what is

expected, but bad some of the pain can be spread over a longer period.

-- but perhaps. I rather like the understatement in your phrase, an

unpleasant outcome. It is potentially a nightmare outcome for

your own particular bank. Are you making active preparations to deal

with the disaster scenario of Greece exiting the eurozone? Yes,

it is something that clearly every responsible person has to plan for.

There is not much one can do in terms of the tremendous amount of

uncertainty, in terms of the fact of the large number of greens that

had had their debt denominated in the euro, they will have to find

ways to pay for it in to P t dated a drachma if that is the currency.

-- depreciated. You have just described how much money you have

poured into Greece, buying sovereign debt and in terms of

private loans and investments. You are very exposed. Do you had we

tell operation in Greece? -- do you have a retail. We have 170 branches.

We have a portfolio of 11 billion, and deposits of about 7 billion. 6

billion is being supported by deposits from Cyprus, which is the

real problem. We are heavily exposed. As you said already, we

had written of almost 2.5 billion in Greek sovereign debt out of the

3.2 that we were exposed. Almost our entire capital was invested in

Greek bonds. If you take all the Cypriot banks, something like 30%

of the Cyprus GDP. Enormous explosion up by any standards. --

exposure. The Greek President said yesterday, as far as he was aware,

up to 800 million euros a day was being withdrawn in haste by Greek

depositors who want to get their hands on the cash and get it out of

the banks. Is that guy to affect your operations in Greece? What

happens if there is a panic, if you have queues outside your branches?

For the time being, we had deposits coming from Greece to Cyprus. To

the Cypriot part of the bank. There is a deposit insurance scheme in

place that can take care of part of the problem. I believe the great

central bank is also making contingency plans to help every

bank that is present in Greece. If this goes on for a long time, if 1

billion is lost every day, then it is becoming a real challenge.

close to that point are we? Are you seeing retail depositors in your

Greek banks are lining up to get their money out of your branches?

No. Under the circumstances, we saw a surprisingly high level of

confidence for the small depositor. We are seeing some of the larger

depositors who have better options and better mobility to really go to

what they perceived to be a safer place, but by and large, we do not

see the concept that you have outlined at that we had seen in the

UK before, or elsewhere, where you have long lines of people demanding

their money. For the time being, and I do believe we have time to

address that issue. You have been disarmingly frank with me about the

extent of the exposure. Would you agree with an economist, Dr Stelios

Platis, who says that our banking sector will not survive, should

Greece leave the euro? I think that is speculation. Our banking system

has to survive. It is the cornerstone of our economy. As we

talk to investors, they look at the prospects of the Greek economy,

particularly in connection with the possibility of natural gas, the

possibility that we do get assistance, we are hoping to get

some assistance from the Hellenic Stability Fund to see us through a

transitional period. It is going to be extremely tough, it is going to

be unknown territory, nobody has experienced this before. But as we

also look at the rest of Europe, this is something that everybody

will want to see, even if it does happen, that it happens in an

orderly way, so the idea does not spread that similar things can

happen in Spain, Italy and Portugal. I admire your calm, but the truth

is your bank is facing an immediate crisis. Unless you can find, as I

understand it, up to 1.8 billion euros of new capital in the next

few weeks, you are basically going to be looking insolvent. Where are

you going to get the capital from? Your balance sheet is covered in

cricket debt, which you are not going to get back, so who would

want to invest fresh capital in your bank today? That is why our

plan as we go forward include some sort of insurance of downside risk

economy. Speaking in frankness, that becomes problematic because

the guarantee comes ee comes ee comes government, which in turn is not

really in a position to access capital markets. There is a clear

possibility of going to the ESFS also, and asking for European

support, we had also be able to get some long-term loans from Russia,

so we had been able to access... what you are saying is very

important. We know that you tried to raise more money in Russia and

for the time being you have failed. I used sending a signal to the

markets are saying that it is time for Cyprus to actually seek EU, IMF

bail out money? We would try to convince people, that risky as it

is, if they get some kind of Cyprus

Cyprus government, and they do know that the Cyprus government, if

necessary, can have access to the European facility, and we are

talking about sums that by about a couple of billion euros,

but that is something that I think built

built around Europe, and although we decide to have -- we did not

decide to had an accident, that is why we have a system in place.

First we go to the private sector, if we do not succeed, we go to

government, and if the government cannot do it, we go to the partners

in the European Union. There is no way that your own government can

handle the scale of the crisis. The truth is, you like Ireland and

maybe Iceland as well, leave in a country that has allowed to the

financial sector to get far too big, your economy is massively over

leveraged, I believe to the tune of seven times the national GDP, and

therefore it is way beyond the scope of your own nation to address

this problem and offer the That is true. But remember, we are

a service-based economy. There was no way we would have the

flourishing of accounting and legal profession, the large number of

overseas companies doing business through Cyprus, without the kind of

banking system that we had. But Mr Sarris, the Icelandic government

justified their actions in the same way. How, as finance minister in

the good years, and now as the boss of Cyprus' second biggest bank, how

have you allowed yourself to become involved in this crazy economics?

First novel, during those years as finance minister, we ended up with

a substantial surplus on the public sector side. -- first of all. We

did our share. It is true that the private sector it thinks things can

only go up. The banks, households, enterprises, the housing bubble.

Tremendous capital inflows from Russia, that fuels the housing

bubble, it gives the possibility for the bed sticky blending. We

have sustainably higher growth rates of bank lending and bank

borrowing. The music has stopped and there are not enough chairs to

sit down. And you say the finance industry was good in your time but

the fact is you allowed, through regulatory oversight, the banking

sector in particular, financial services, to grow so big that there

is no way the government could ever offered guarantees during the bad

times. Yes, we have to accept collective responsibility. Remember,

it was a period of low interest rates in Europe. A period of free

capital movements. A period in which countries could not do

anything different from other countries in the eurozone. In

retrospect, we should have been more careful. The regulator that

never imagined there would have been austerity of this kind. Those

making the investment decisions allowed the profit for the year in

question to cloud their judgement about the medium-term dangers that

they were building by those decisions in investing so heavily

in Greek government debt. Mr Sarris, I believe the Socialist minority

government not so long ago ask you to return to the finance ministry

and you were to -- refused. Is that because you have no confidence that

the current site this government is not capable of delivering emergency

measures needed to try to address the problems we have been

discussing? My judgement was at the time that there were better suited

people closer to the party, closer to the ideology, that would have

been more convincing about what needed to be done. We have proof of

that. The minister that took over last August was able to convince

the government to take those measures their turf than I could

have done, because I was already associated with saying to take care

of the debt. It therefore would have been a repeat of the same

message for me. But coming from a people -- coming from a person in

that party, that was more convincing. But I wonder if you now

fear, we have talked about Greece a lot already, that Cyprus could

follow the Greek model, that is go into severe contraction, see rising

unemployment are leading to social unrest and the rise of political

extreme parties, meaning there is no consensus of a realistic way

forward? Do you see that as a possible breakdown for your own

country? We have started already. We have learned our lesson. We were

late in taking measures but I think now the social consensus is

developing, that tough measures might be a good alternative to the

prospect that you just outlined. I am now convinced that we will take

those measures that will get us back into fiscal stability and send

a message of confidence to the private sector to consume and

invest in ways that would create jobs. Our unemployment rate, high

as it is, is still in single digits. So we are really far from this

scenario that you have outlined. The fact that we are watching it

unfold in Greece gives us some sort of comparison of what things might

develop to unless we take the tough decisions that we need to take now.

I wonder how you react to the former central bank governor,

widely respected, Athanasios Orphanides, saying that before he

left last year, he said that Cyprus is facing a state of economic

emergency not seen since the war of 1974. Do you think he was

exaggerating or was he right? think he was right. He was bringing

a loud bell. He was outlining the possibility of something really

developing into an unmanageable crisis. I think he has been able to

convince a growing number of people and I think we are now on a page in

which we are really taking some of the measures that we should have

taken a long time ago. So I am confident that we are going to...

We are not going to quickly get into the high growth rates that we

have experienced before 2007. But I believe we will hover around zero

for a while and we will gradually get the unemployment rate down. We

have a lot of economic migration in Cyprus that has slowed down and has

become also an outflow. We have a lot of people in the service sector

that have weathered well. The accountants, lawyers, they have

weathered the storm of the international economy much better

than those countries that have to rely on goods... On primarily goods.

Before the end, I want to turn to another challenge facing Cyprus. In

a way, that quote about the state of emergency going back to 19

raises this issue. That is, the relationship with Turkey. -- 1974.

You have been trying to move forward the reunification dialogue

with the north of the island, the Turkish Cypriots. Is that dialogue

going nowhere? Yes, that is a fair assessment. We made a very serious

effort. The idea of a federation was accepted. It would not have

been a sensible thing to do on a small island. But if you have two

people that need time to begin to get on with each other, again, we

have to go through a period of a federation. With a sensible

arrangements that we unified the economy and with the prospect of

the national resources surrounding the island, we should have been

able to do much better. -- reunify. For you talk about the national

resources, wasn't it extraordinary impolitic after your government to

begin a high profile exploration of oil resources off your coastal

waters when the Turks called it that this? The Turks made it plain

that in their view, there should be no exploration until the

reunification deal had been done. Why did your government to that?

Why not? It is... We are a sovereign country and we have the

possibility to show that there is enough well for everybody. But the

point is, this was not the message you were sending. By sending the

drills while you were still in the middle of talks, you were saying,

never mind the unification, we will exploit the oil even before

reunification, as our own Cyprus resource. That is one way to look

at it. Another is to say, here is a possibility that could give huge

construction costs. There will be a challenge of convergence of income

per capita. Let's join hands. We have enough resources for Turkey,

Cyprus, Greece, Israel, the whole neighbourhood. We needed a little

more magnanimity on the part of Turkey. The balance of power is

very heavily on the side of Turkey. Now, this gives us the possibility

to make some better alliances in the neighbourhood that perhaps will

make this dialogue a little more balanced. And perhaps it will give

us a better chance of succeeding. But most of our conversation has

been about the terrible weakness of the Cypriot economy. We heard one

Turkish officials say annexation of Northern Art -- northern Cyprus is

still an option. Are you worried that Cyprus's current weakness may

be exploited? -- cypress'. For yes, of course. It is not a very

pleasant situation. It is also agrees that we have talked about. -

- also Greece. But most Turkish Cypriots are also looking at the

possibility of the benefits that will come from reunifying the

island and keeping the peace deal going. There are threats concerning

talking about annexation. But on the other side of the balance sheet