Special Report: How a Greek bank infected Cyprus

ATHENS/NICOSSIA (Reuters) - Like many Greek tycoons these days, Andreas Vgenopoulos is in trouble.

Marfin Investment Group (MIG) Chairman Andreas Vgenopoulos addresses journalists during news a conference in Athens, June 22, 2009. REUTERS/Icon

The self-made businessman built one of Greece’s leading corporate empires over the past two decades. Among its jewels was a major bank in the nearby Mediterranean island nation of Cyprus. Then it all started to unravel.

In 2010, Marfin Investment Group (MIG), the firm Vgenopoulos managed which has stakes in everything from privatized national carrier Olympic Air to food giant Vivartia, lost 1.8 billion euros ($2.2 billion). The loss, largely made up of write-downs on goodwill, was the biggest ever for a Greek company to that point. There is a joke in Athens that MIG’s initials stand for “Money Is Gone.”

Meantime the Marfin Popular Bank was a major lender to an order of Greek monks who received swathes of prime state-owned land in sweetheart deals, and who in turn bought shares in MIG. A Greek parliamentary inquiry alleged serious “conflicts of interest” in how bank loans were issued to finance MIG’s wider activities.

Vgenopoulos denies any wrongdoing. But his travails shed light on a factor largely overlooked in the narrative of the Greek economic crisis, which is now threatening to force Athens out of the euro zone and unravel the currency along with it: the debts many Greek banks built up by lending to each other and to associates.

As Greeks head back to the polls in an election that may help to decide whether they stay in Europe’s common currency, and as Cypriot politicians move closer to asking for an international bailout - perhaps as early as this week - the story of Vgenopoulos and Marfin helps explain how Greece and Cyprus got here.

Last November, regulators in Cyprus pressured Vgenopoulos to give up his chairmanship of Marfin bank. Now renamed Cyprus Popular Bank, it was placed under state management in May. The bank’s new executives have uncovered what they suggest is evidence of huge exposure at its Greek businesses to risky investments, including loans issued to investors who bought shares in the MIG conglomerate. They allege this has left the bank too vulnerable to MIG’s fate.

“I think clearly there were many decisions which were in retrospect unwise,” said Michael Sarris, a former Cypriot finance minister who has taken over as chairman of the seized bank. Senior bank officials say the central bank of Cyprus is preparing to order an inquiry into what may have gone wrong at Marfin - and into shortcomings by Cypriot regulators.

Analyses of the Greek crisis have focused on the most glaring cause of the country’s woes: the hundreds of billions of dollars in debts racked up by Athens, which has so far required two bailouts.

Less attention has been paid to the nation’s banks, which are due to be bailed out with 30 billion to 50 billion euros in guarantees from European taxpayers. A look at Marfin, along with previous Reuters examinations of Greek lenders Proton and Piraeus, suggests that the nation’s financial woes were exacerbated by conflicts of interest at some banks and by light regulatory supervision of them.

Manolis Bedeniotis, a just-retired MP with PASOK, the Greek socialist party, said it was clear there was a “lack of substantial regulatory control on the banking system”. Loans were often issued based on “a network of personal relationships,” starving those in the real economy - small and medium businesses and farmers - of access to finance. “This is the evolution of a system that was functioning according to its connections with the political and the economic power, and in the end reached a point of even being above it.”

The scale of Marfin’s problems poses difficulties for the Cyprus government. In a parliamentary session on May 17, they voted to help the bank fill a capital shortfall estimated by the bank and the country’s finance ministry at nearly 2 billion euros. Lawmakers in Cyprus fear that if no new private investors are found, the bank could even force the republic, one of the smallest economies in the euro zone, to seek its own bailout. The money needed represents a tenth of the country’s GDP.

An independent MP, Zacharias Koulias, told the Cypriot parliament ahead of the parliamentary vote that in his years in parliament, “it’s the first time we are in such a difficult position.” Like many other Cypriot politicians, he blames Vgenopoulos.

“How could (Cypriot authorities) be fooled by a man who took the capital of Cypriot depositors to Greece and turned it into thin air?” Koulias said. “Is it even possible for a man to come to our country, grab the capital and leave, and all these managers didn’t realize what was going on?”

Vgenopoulos rejects any suggestion of blame. Interviewed in his wood-paneled MIG boardroom in Athens, dressed in jeans and polo shirt, he said Cypriot regulators had conducted a smear campaign against him. His exit as non-executive chairman of Marfin - Vgenopoulos said he jumped rather than was pushed - was part of a “coup” organized by the then-governor of the central bank of Cyprus, Athanasios Orphanides.

“The biggest mistake of my career,” he said, was to keep his bank in Cyprus, where now “they are throwing allegations against me, they are discovering old things ... I ended up in a trap.”

Orphanides declined to comment for this story.

The former Marfin bank’s biggest immediate problems stem from having to write down the value of its investment in Greek government debt to 720 million euros from 3.05 billion. Such haircuts have been forced on banks holding Greek sovereign paper across Europe, as part of the latest bailout of Athens.

“There was too much lending, too much concentration of risk in one instrument,” said Sarris, the new non-executive chairman. “And that suggests that the mechanisms of the bank did not work properly.”

But the bank’s other lending in Greece may have added to the problems. Of its capital shortfall, the bank estimates nearly one-third arises from provisions for bad loans in Greece. According to Sarris, the “single most important factor” dissuading investors from helping recapitalize the bank was now not sovereign bonds but concern that further losses in Greece could materialize.

“We now have a loan portfolio in Greece of about 12 billion and funding of 6 and 7 (billion euros),” he said. The gap has to be financed by Cypriot depositors.

Sarris says Marfin undertook large-scale lending to finance the purchase of MIG shares and other Greek stocks, and he wants an investigation of the deals. At issue is whether the bank executives acted improperly or just took too many risks, either by using the loans to fund the shares of affiliated companies or by failing to obtain sufficient collateral.

“Purchases of shares were made with loans, which in and of itself is not a very good practice,” said Sarris. The risk was compounded by the fact that the loans were mainly secured with the very same shares. This made the collateral shaky, because stock prices can drop. “It is even less wise when (the) companies that do that are related.”

Slideshow ( 3 images )

Senior bankers in Cyprus, Cypriot and Greek central bank auditors, and some Greek politicians argue that Marfin became too close to MIG’s shareholders, creating conflicts of interest and possible breaches of banking rules. While share loans, or margin loans, are common practice in most western markets, if the value of the shares falls, lenders typically require investors to put up more collateral or sell the stock.

Sarris said the bank may now sell the two Greek banks it owns. The extent of possible conflicted lending still needed to be pinned down. “There is a lot of smoke, which means there is some fire,” he said. “But how much of it, and to what extent can it be justified, I am not sure.”


A former Greek fencing champion who competed in the 1972 Olympics, Vgenopoulos is a lawyer by training. He made his name at a shipping-law practice where he built a reputation as a persuasive salesman and dealmaker. “I am not rich,” he once told a reporter. “I consider myself to be a poor man with money.”

He has never shied from confrontation. He once caused outrage in the Greek parliament when he said that, while he was a servant of shareholders, “you, in your turn, are the servants of the people, therefore my servants.”

He founded the Marfin group in 1998, focusing on investments in banking. In 2006, the group moved its base to Cyprus with the creation, after a merger, of Marfin Popular Bank.

In 2007 Vgenopoulos split off all the non-banking businesses and grouped them together in MIG. He then organized a 5.1 billion-euro rights issue for the Athens-listed MIG, diluting Marfin bank’s stake in the company to 6.5 percent from 97 percent. As a result, MIG and Marfin became legally separate.

Vgenopoulos remained on the boards of both companies. At the Marfin bank he was chief executive and then executive vice-chairman of the bank until 2010, when he became non-executive chairman. At MIG, he was the most senior executive until becoming non-executive chairman in January. He has only small personal stakes in the companies.

“The aim of the Marfin group is to become one of the biggest European business groups with a market capitalization of over 140 billion euros in the next five years,” Vgenopoulos said in 2007, referring to MIG.

Only a year later, some in Greece started to question where the money to buy MIG shares had come from.

The trigger for those questions was a scandal over the Vatopedi Monastery on Mount Athos, on a remote peninsula in the north of the country.

Greek investigative journalist Kostas Vaxevanis showed how the Vatopedi monks had engaged political help to obtain the rights to a nature reserve in northern Greece and then, with more help, to swap it for valuable state-owned real estate across the country. The monks were also major players on the stock market and received 109 million euros in loans from Marfin bank.

The Vatopedi scandal helped push the conservative New Democracy party from government in 2009 and exposed the extent of corruption in Greek politics. Largely lost in the furor, though, were the questions the Vatopedi scandal raised about the Greek banking system.

A special inquiry on Vatopedi in 2010 heard the monks spent 30 million euros they borrowed from Marfin bank, the monastery’s biggest lender, to buy shares in the MIG rights issue, plus another 42 million euros in other investment schemes with MIG or its associates.

Greek MPs went on to compel the Bank of Greece to provide details of all the loans that Marfin Popular Bank’s two Greek subsidiaries at the time, Marfin-Egnatia and the Investment Bank of Greece, had made to investors to take part in the capital-raising.

George Provopoulos, the Bank of Greece’s governor, revealed to MPs that Marfin-Egnatia had in 2007 loaned more than 700 million euros to finance the purchase of MIG shares in the rights issue, and the bank had been sanctioned for failing to categories them all as “margin loans” - loans to buy a security, usually shares. This allowed them to bypass more stringent controls.

“Margin loans are legal, if conditions set by the law are respected,” Provopoulos told MPs. “If the value of the collateral drops, then the bank is asked to increase its capital.”

The most critical evidence came from a joint inspection of Marfin-Egnatia by auditors of the Bank of Greece and Central Bank of Cyprus conducted in March 2009. The report, seen by Reuters, said the bank had been undertaking risks “whose level and nature provoke concerns to the supervisory authorities regarding their correct and adequate management”. Loans from Marfin to the MIG group suggested “favorable treatment” while “the relationship between MPB group and MIG group creates the impression that the close ties between the two groups played a significant role in the approval of those loans.”

The Vatopedi inquiry report, finished in October 2010, stated that Marfin was improperly channeling loans to the monastery into schemes that benefited MIG. There were “serious conflicts of interest” for those who ran Vatopedi and its advisers but also for the administration of Marfin which had given “huge amounts” of cash that benefited not only the monastery but “simultaneously executive members of the administration of Marfin”.

It described a “heap of violations, perjury, and possibly falsification of documents” by those directly involved with Vatopedi, as well as by Marfin’s two Greek subsidiaries. The “tolerant” role of the Bank of Greece left members of the committee “particularly troubled.”

In a letter to Greece’s supreme court, the chairman of the committee, Dimitris Tsironis of the socialist party PASOK, asked for an investigation into allegedly illegal actions by Marfin and others. Tsironis also made wider allegations, arguing that Marfin-Egnatia had become a vehicle to pour nearly 2 billion euros into the hands of a small group of MIG investors.

Marfin loaned money “to well-known tycoons and businessmen” to buy shares in MIG.

All the loans for shares were granted, said Tsironis, on “extraordinarily advantageous terms to the borrowers thanks to the close ties between MIG and Marfin.” And it created a special credit risk that should have been spelled out publicly.

Marfin and MIG, he said, were effectively inseparable, not least because they had many common executives and many common shareholders. “The lending nexus between Marfin and MIG and the other related companies creates a huge co-dependence and risk concentration.”

Provopoulos, the Bank of Greece governor, disagreed and said that because MIG and Marfin were separate companies, the loans to buy MIG shares were acceptable. Provopoulos said Tsironis did not understand the data. MIG was “neither directly or indirectly” a parent of Marfin Egnatia or Marfin Popular Bank in Cyprus. MIG didn’t exercise a “dominant influence” on Marfin, he said, nor were MIG and Marfin “subject to joint management.”

In a statement to Reuters, the Bank of Greece said it had provided MPs with “all relevant information,” but that legally it had an obligation of secrecy which means “we are not allowed to provide you with any further information on these questions.”

Vgenopoulos is dismissive of Tsironis. He says the loans to MIG and its associates are secured and have generated huge income for the bank. The risk from loans secured on MIG shares was also exaggerated: it was misleading to measure risk to the bank based on the market price of those shares, since the shares are “hugely discounted,” trading at a tenth of net asset value. The bank made big profits from its Greek portfolio during good times, he said, and should look to the long term.

Vgenopoulos accused the MPs on the committee of cowardice because they never summoned him to give evidence. He and his companies filed three lawsuits against Tsironis for defamation, of which one has been dismissed and two are still to be judged.

Vgenopoulos says Marfin was cleared of wrongdoing by the Bank of Greece after the 2009 audit and the MPs’ report, as well as by money laundering investigators and by the Capital Market Commission (CMC), which regulates the stock exchange. “Nothing has ever been substantiated,” he said.

Costas Botopoulos, chairman of the CMC, said that the commission doesn’t have oversight of the Vatopedi case and hasn’t conducted an inquiry.

Panayiotis Nikoloudis, the head of Greece’s anti-money-laundering agency, said there was no reason to investigate Marfin’s activities. “The Bank of Greece already investigated this case and found everything was all right. I have seen no strong argument that should overturn its conclusions.”

Two senior prosecutors in Athens, however, said judicial investigators still had an open inquiry into the MPs’ discoveries.

Over the past year, Cypriot regulators have taken a closer look. According to senior banking officials in Cyprus, central bank governor Orphanides told his staff last autumn that Marfin Popular Bank’s purchase of too many Greek bonds had resulted in a liquidity crisis.

Relations between Orphanides and Vgenopoulos deteriorated, and in November Vgenopoulos quit as Marfin’s chairman, just as Orphanides was preparing to ask him to resign on the grounds that he was responsible for the cash crunch. A month later, chief executive Efthimios Bouloutas was sacked on the instruction of Orphanides, who has not publicly said why. Bouloutas, who declined to comment, now runs MIG in Athens.

The former Marfin’s new management believes the bank’s exposure to loans given in 2007 to buy MIG shares may be much greater than has been reported. A total of more than 510 million euros has still not been paid back. With MIG’s shares trading at just 3 per cent of their 2007 level, the collateral for these loans is now valued at around 140 million euros.

Orphanides stood down in April after the government opted not to renew his five-year term. In his few public remarks on the matter, he accused Cyprus’s ruling communist government of siding with Vgenopoulos and opposing more stringent banking regulations. “It saddened me to be the recipient of political interventions which in all cases were to relax the supervisory framework or meet certain interests,” he told parliament.

At a press conference in Cyprus on May 4, Vgenopoulos, who said he was fighting for tougher rules, accused Orphanides of acting improperly.

“It was the theatre of the absurd. Having made life for the bank incredibly difficult, he started making extra-institutional and illegal interventions to shareholders,” Vgenopoulos said. “The governor of a central bank was calling shareholders! He was meeting shareholders by appointment in his office. He called Dubai” - the Dubai Financial Group, which is Marfin’s biggest shareholder and MIG’s second-biggest shareholder. “They were quite shocked, and he was taking them to taverns in Cyprus.”

A spokesman for the Dubai group declined to comment.

Vgenopoulos says he has nothing to hide about the relationship between MIG and Marfin. Asked about loans given to buy shares in MIG’s capital-raising, he said that they were not designed to help MIG. The capital raising was so oversubscribed, all of the shares would have been sold even if no loans were issued, he said.

“These loans were given by the bank to meet demands of clientele which could not be refused, from good customers, each one of whom had a relationship to the bank, from which the bank earned a lot of money, and the bank could not say no.”

There were no loans to shareholders, as Tsironis alleged, because existing bank customers only became MIG shareholders after the bank loaned them money.

Vgenopoulos supplied a copy of a note he sent on June 29, 2007, to remind bank staff that clients should not risk undue exposure and make investments with money they did not have. He said the message was followed up a week later by a letter to staff from the human resources manager.

“Also, no loans were given to my friends, to my relatives, to me,” Vgenopoulos said.

Vgenopoulos, who believes the bank is now being mismanaged, thinks Cyprus should call in BlackRock, the U.S.-based investment firm that audited the loan books of major Greek banks, to do the same there. Attempts to blacken his name and the name of Marfin would only damage Cyprus, he said.

Grey reported from Nicosia and Athens; Kambas from Nicosia; Leontopoulos from Athens; additional reporting by William Waterman in London. Edited by Simon Robinson and Sara Ledwith