New York Times: In Greece, the Banking Chief Draws Scrutiny

By Landon Thomas, Jr.

ATHENS — In an era when central bankers like Ben S. Bernanke dominate the global economic stage, few hold as much power within their own country as Georgios A. Provopoulos, the governor of the Bank of Greece, who has played a crucial role in keeping Greece out of bankruptcy and in the euro zone.

But now Mr. Provopoulos faces one of the bigger challenges of his tumultuous reign: an investigation into whether he abused his position by clearing a banking deal involving his former employer and a business magnate who was subsequently charged with embezzlement and fraud.

In a confidential report issued last May, a senior Greek prosecutor said that Mr. Provopoulos approved the 71 million euro ($96 million) deal despite warnings from his staff regarding the buyer’s finances. The report, parts of which were reviewed by The New York Times, hints at the scope of the investigation, about which little has been previously disclosed.

There is no evidence that Mr. Provopoulos profited personally from the transaction, which was ultimately approved. But his role — and the chance, however remote, that he might face criminal charges — could have ramifications beyond Greece. Other countries in the euro zone have invested more than 40 billion euros to shore up the Greek banking system. In the process, they have pressed Athens to clean up the corruption and crony capitalism that have been at the root of the country’s problems.

According to the report, Mr. Provopoulos allowed the businessman, Lavrentis Lavrentiadis, to enter into a deal with Mr. Provopoulos’s former employer, Piraeus Bank, at a vastly inflated price. The transaction enabled Mr. Lavrentiadis to gain control of another bank, Proton, and, in the process, benefited Piraeus, which was struggling.

The dossier cites a number of red flags that banking supervisors raised about Mr. Lavrentiadis, including excessive debt and suspicions of money laundering. Last December, he was charged with embezzling from Proton to prop up his other interests. He is being held in prison pending trial and has denied the charges.

Proton Bank had to be bailed out by the Greek government, at a cost of 1.3 billion euros.

The deputy prosecutor at the time, George Kaloudis, argued in his report that there were enough questions concerning the transaction to warrant further investigation of the central bank’s handling of the affair. Mr. Kaloudis, who is no longer in his position, declined to comment.

Mr. Provopoulos, in an interview, said all of his actions were taken to prevent the Greek financial system from imploding and that the central bank’s board unanimously approved the Proton deal. He added that Mr. Lavrentiadis had a 20-year record as a successful entrepreneur and had promised to make the bank a more conservative institution.

“He was ready to inject additional capital in the bank, and he satisfied all formal and legal requirements,” Mr. Provopoulos said. He pointed out that Mr. Lavrentiadis was ultimately arrested and charged based on evidence provided by the central bank.

The controversy over Mr. Provopoulos and the Greek bank bailouts echoes the public discontent over the taxpayer-financed rescues of large American banks during the financial crisis that began in 2008. Five years ago, Henry M. Paulson Jr., the former Goldman Sachs chief who was then Treasury secretary, and others with ties to Wall Street orchestrated those bailouts, prompting a public outcry.

In Greece, Mr. Provopoulos fast-tracked a slate of deals that transformed Piraeus Bank, where he had been a vice chairman before joining the central bank, into the nation’s most powerful bank.  The legal saga is also a visible sign of a behind-the-scenes power struggle between Mr. Provopoulos and the government of Prime Minister Antonis Samaras over control of the country’s banks, which for decades have been a source of patronage and influence in Greece.

Whether prosecutors will formally charge Mr. Provopoulos is unclear. Mr. Lavrentiadis’s lawyers have argued that their client’s case and that of Mr. Provopoulos must be investigated together, as Mr. Kaloudis suggested in his report.

The governor’s supporters say that the inquiry is politically motivated and baseless, an attempt to force out Mr. Provopoulos so that the largely discredited political class can reassert itself. But Mr. Provopoulos’s critics argue that the playbook used in the Proton deal — described as a series of back-room maneuverings that rewarded Michalis G. Sallas, the domineering chairman of Piraeus Bank — was deployed repeatedly, most recently when Piraeus bought the Greek operations of three Cypriot banks last March at a knockdown price of 524 million euros, and a few months later booked a profit of 3.5 billion euros on the transaction.

“The position of the governor has become very strong, and I do not think that he has been subjected to proper scrutiny,” said Pavlos Eleftheriadis, a law professor at Oxford University who has been critical of how special interest groups in Greece have expanded their influence and power in recent years. “There was the spectacular failure of Proton, and there are questions about the Piraeus deal in Cyprus. We need root and branch reform of all our institutions — including the Bank of Greece.”

It is not hard to see why Mr. Provopoulos has become a lightning rod. He has done little to disguise his low regard for the political establishment, openly criticizing its fiscal policies and privately upbraiding both the conservative New Democracy party and the left-leaning Pasok party for not attacking Greece’s economic problems with more force and speed.

“I am not in this job to please politicians,” Mr. Provopoulos, 63, said in an interview here in his capacious office. “I am not just an ordinary citizen. I have much larger responsibilities. My actions will be judged in the future after the dust has settled and people are in a better position to assess the results.”

His senior status within the governing council of the European Central Bank, which, along with the International Monetary Fund and the European Commission, has pursued a brutal austerity regime for Greece, has fed suspicion that he identifies more closely with technocrats in Brussels and Frankfurt than with the beleaguered Greek public.

And he has indirectly challenged the authority of Mr. Samaras, who became prime minister in 2012 and who had expected that the role of banking kingmaker would be reserved for the prime minister, as has been the custom in Greece.

For decades, political influence in this country has been a direct function of a politician’s ability to borrow and spend, with local banks, as the main buyers of Greek government bonds, acting as the primary facilitators. Under an austerity regime, such an approach is no longer possible. And as governments have come and gone — to date, Mr. Provopoulos has survived five prime ministers and seven finance ministers — the power of the Bank of Greece’s governor has only solidified.

Trained as a professor of economics, Mr. Provopoulos is no ivory-tower academic. His style — self-confident, if not a touch combative — conveys the attitude of a top-level bank executive, the role he performed for a decade before taking charge of the Bank of Greece in 2008. As he sees it, his experience as a no-nonsense deal maker has been critical to Greek banks, in preventing them from succumbing to last year’s near-fatal bank run and in their re-emerging now with a fresh charge of capital, courtesy of the European taxpayer.

His response to the bank panic had the feel of a military campaign. Under cover of nightfall, cargo planes from Frankfurt and other European capitals flew in pallets of cash, which were then transferred by boat, truck and train to banks throughout the country. And with one Greek bank after the other facing possible failure, the spate of bank mergers that he orchestrated in such a short period was unprecedented.

“My experience as a commercial banker was very helpful,” he said. “I believe we did a good job — if the banking system had not been protected we probably would have had to exit the euro area.”

During the struggle to salvage the Greek economy, he said, nodding gravely in the direction of his desk, “the center of gravity was right here.”

Mr. Provopoulos’s six-year term concludes next June, and while it is customary for new prime ministers to name their own central bank heads, a growing number of bankers and investors argue that Mr. Provopoulos should be reappointed in light of the country’s fragile financial condition. But the Proton investigation could change that.

To some extent, the Proton transaction gets at the essence of what has made Mr. Provopoulos such a polarizing figure here. Pulled together quickly at the end of 2009 and early 2010, the deal drew upon the central banker’s crisis management skills and showed his willingness to make a chancy bet in the hope that the payoff of a more stable banking system would justify the risks. But it also shines a not-so-flattering light on the murky give-and-take among bankers, business leaders and government officials that has long been par for the course in Greece and that many believe lies at the root of the country’s economic collapse.

At the time, Mr. Lavrentiadis was sitting on over 2 billion euros of debt. Piraeus, under Mr. Sallas, was looking to unload its 31 percent stake in Proton, which it had acquired in 2008.

The deal, as Mr. Provopoulos saw it, would solve two problems: it would give Piraeus a needed infusion of cash and the shaky Proton a new owner who promised to invest in and stabilize the institution.

The Proton deal was announced on Dec. 29, 2009. The next day, Mr. Lavrentiadis wired 71 million euros to Piraeus, according to the prosecutor’s report — even though the sale had not been formally approved by the central bank’s regulatory division.

As weeks passed without a nod from regulators, Mr. Lavrentiadis became worried that he would never gain control of the bank. Mr. Lavrentiadis told prosecutors that he met with Mr. Sallas, the Piraeus chairman, in late March and said that he had decided to pull out of the deal.

“Don’t do that,” Mr. Sallas replied, according to Mr. Lavrentiadis’s account. “Let me call my good friend George Provopoulos, and he will do what is needed to get this deal cleared.”

A few days later, the central bank approved the sale.

Piraeus Bank, in a statement, said: “The allegation that Piraeus Bank or its chairman intervened inappropriately to facilitate the sale of Proton Bank shares to Mr. Lavrentiadis bears absolutely no resemblance to reality and reflects the diversionary defense line recently concocted by Mr. Lavrentiadis, a full 28 months after he was initially charged.”

At the root of Mr. Provopoulos’s defense is his view that at the time of the deal, in March 2010, Mr. Lavrentiadis had a strong enough reputation as a businessman to be approved as a new bank owner in Greece. This was not, however, an opinion that was shared by the head of Cyprus’s central bank, who rejected an attempt by Mr. Lavrentiadis to buy a bank in Cyprus during the same period, contending his finances were questionable.

In retrospect, Mr. Provopoulos said, he accepts that Mr. Lavrentiadis was a bad actor. But he rejects the criticism that the Proton sale and Piraeus’s Cypriot deals reveal any favoritism to his former employer or Greek banks in general.

“My first and only priority is to ensure the stability of the financial sector,” Mr. Provopoulos said. Mr. Sallas of Piraeus was prepared to take risks that others were not, he added.

As for Mr. Lavrentiadis, he continues to protest his innocence.

“If I am guilty,” he said recently to government prosecutors, “then so are Mr. Sallas and Mr. Provopoulos.”

Source: nytimes.com

A Wily Banker Reaches the Top

By LANDON THOMAS Jr.

ATHENS — Not long ago, Michalis G. Sallas, the chairman of Piraeus Bank in Greece, had a dream: to make his bank too big to fail.

But now that he has managed to turn his bank into Greece’s largest, ensuring that Piraeus will be eligible for a bailout from the European Union, Mr. Sallas runs the risk that some of the steps he has taken along the way may come back to haunt him. Those moves include borrowing more than 100 million euros ($132 million) from a friendly banker in a bid to prop up the falling shares of his own bank and making risky loans to people and entities with ties to Piraeus.

Europe is preparing to close the books on perhaps the most ambitious aspect of its plan to keep Greece afloat: a cash injection of about 50 billion euros into the country’s four largest banks.

And bank governance has emerged as a critical issue, with the country’s creditors, who arrived in Athens this week to carry out their latest audit, insisting that continued aid is conditional on banks’ demonstrating that their conduct is above reproach.

Still, Greece’s overseers from the European Union and the International Monetary Fund may well find that even with increased oversight, changing the freewheeling business culture that long defined the Greek financial system will be easier said than done.

The rapid rise of Mr. Sallas exemplifies that culture. A tough, charismatic banker who seized control of Piraeus in 1991 and built it up by dint of more than 15 mergers and acquisitions, Mr. Sallas reached the pinnacle of the Greek banking world in March when he capitalized on Cyprus’s banking disaster, buying the Greek units of that island’s three biggest financial institutions, Bank of Cyprus, Laiki Bank and Hellenic Bank.

His supporters say that Mr. Sallas should be hailed for his entrepreneurial expertise and robust appetite for risk. Seeing an opportunity to reinvent his bank, they say, he has stolen a march on his more sclerotic counterparts.

“He is someone who can really navigate the system in Greece,” said John P. Rigas, a Greek-American hedge fund operator and client of the bank who owns an Athens-based investment company in which Piraeus holds the largest share. “This bank has gone from a teetering No. 4 to a solid No. 1 in just a year.”

But others say that Mr. Sallas has pushed the boundaries of proper banking too far and that his maneuvering in the murky world of Greek finance, where the interests of bankers, the media and politicians often commingle, should be more closely scrutinized.

“Piraeus has long used problematic methods that call for investigation,” said Costas Lapavitsas, a political economist at the University of London who follows banking and politics in Greece. “What concerns me is that Piraeus has emerged as the leading bank in Greece not because it improved these methods. The old regime is just adapting to the new conditions, and for me that is a sign of sickness and not health.”

Anthimos Thomopoulos, deputy chief executive of the bank, said all aspects of Piraeus’s business “have been exhaustively examined by independent auditors and regulators, inside and outside Greece, with no adverse findings.”

A trained economist, Mr. Sallas, who is 62, made his first career strides working under Andreas Papandreou, the Socialist premier who led Greece in the 1980s. In the years since taking over Piraeus his influence has continued to expand. He is close to the governor of the central bank, George Provopoulos, who until 2008 was vice chairman at Piraeus. And the bank is one of the largest advertisers in the Greek media.

Altogether, European governments and the International Monetary Fund have staked about 200 billion euros of taxpayer money on keeping Greece in the euro zone and eventually restoring its economy to health. To justify this commitment, Europe has subjected Greece’s largest banks to a root-and-branch investigation, focusing in particular on related-party lending, or loans to entities in which the bank may have a financial interest, and has concluded that they have finally cleaned up their acts.

With regard to Piraeus, however, this assessment clashes with the conclusions reached by a team of auditors at Laiki Bank in Cyprus, one of the banks whose Greek unit Piraeus acquired in March.

Under new management in 2012, the bank’s board authorized a full-scale audit and uncovered loans of 113 million euros made to three offshore investment vehicles controlled by Mr. Sallas and his son George and daughter Myrto.

According to the Laiki audit reports, copies of which were made available to The New York Times, these loans were used to buy Piraeus shares in the open market and participate in a rights issue in 2011.

Despite repeated requests from Laiki, auditors say, Mr. Sallas did not post additional collateral as the shares rapidly lost value; eventually the debt, measured by the gap between the size of the loan and the Piraeus stock that backed it, reached 107 million euros, according to the reports.

In a separate report by PricewaterhouseCoopers, Laiki was advised to set aside 93 million euros against the Sallas family loans. And last month, in a letter to Parliament, the central bank of Cyprus said that it had warned as far back as 2011 that the loans required provisions.

In mid-February, just a month before the bank was bought by Piraeus, the loans were transferred to Laiki’s recovery department, according to people briefed on Mr. Sallas’s credit history. This is the area of the bank where legal proceedings and other forceful remedies for seeking repayment of delinquent loans are deployed.

A spokesman for Piraeus says that Mr. Sallas, via an outside company, only borrowed 44 million euros from Laiki and that this loan is in good standing.

When the Cyprus transaction was announced in March, it was seen as the masterstroke of Mr. Sallas’s deal-making career, capping an extraordinary run in which he purchased the healthy portions of four midsize banks for nominal sums. In roughly a year, the bank doubled in size, going from a laggard trailing its three peers to, by Greek standards, a behemoth, with 100 billion euros in assets and a country-leading network of 1,306 branches.

The transaction also put Mr. Sallas in charge of the bank that a month earlier had deemed loans owed by his family’s investment vehicles as uncollectable.

Although highly unusual, there is nothing illegal about one bank absorbing another where its top executive has a large outstanding debt.

But the Laiki examiners, in their audit reports, argue not only that the loans made no financial sense and were not sufficiently collateralized or guaranteed but also that they were part of a quid pro quo that reflected a “broader cooperation” between Laiki’s former chairman, Andreas Vgenopoulos, who auditors say signed off on the loans, and Mr. Sallas.

With regard to the Sallas loans, a spokesman for Mr. Vgenopoulos, said in an e-mail that at the time “Mr. Vgenopoulos was vice chairman of the bank and had no involvement or knowledge of these alleged and totally spurious transactions.”

A lawyer turned entrepreneur, Mr. Vgenopoulos built the Marfin Investment Group, then the parent company of Laiki, into one of Greece’s larger holding companies during a boom that followed Greece’s entry into the euro zone and that lasted until about 2006.

The two men have known each other since 2001, when Mr. Vgenopoulos bought a small investment bank from Piraeus that became Laiki.

From the outset, examiners focused on a troubled convertible bond offering by the Marfin Investment Group in March 2010.

When it became clear that investors were not interested in the deal, the original target of 403 million euros was scaled down to 252 million euros. On March 22, Marfin thanked investors for their participation and hailed it as “a great success and a strong vote of confidence” in the group.

But Laiki investigators reported that of the 252 million euros, only 25 million euros came from outside investors. The rest, they said, came from either investment entities tied to Mr. Vgenopoulos or from Mr. Sallas’s Piraeus Bank.

“At least 70 million euros for this bond issue came from lending by Piraeus Bank either as part of the broader ‘cooperation’ between Vgenopoulos and Sallas or as quid pro quo for the loans made to buy Piraeus stock,” the investigators wrote in their final report last August.

A spokesman for the Marfin Investment Group said the company had no knowledge of the transactions referred to by the investigators.

The spokesman for Piraeus said the claim was “totally untrue.”

Neither the Bank of Greece nor the Hellenic Financial Stability Fund, the entity overseeing the recapitalization effort of the Greek banks, would comment on the relationship between the two men. A spokesman for Greece’s creditors said that it was up to Greece’s central bank to take action on any governance or lending matters.

Mr. Rigas, the Greek-American hedge fund executive, says he believes that there is nothing wrong with lending to related parties and that that is the way business is done in an economy dominated by banks.

Citing his own experience, he says he borrowed 84 million euros from Piraeus to buy a small investment company in hopes of attracting foreign investors to Greece. With the onset of the crisis in Greece, Mr. Rigas’s company, Sciens International, suffered significant losses, jeopardizing its ability to make good on its loans.

Piraeus, which still had a 28 percent stake in the company, eventually repackaged these loans into a corporate bond offering. Instead of syndicating the loan to other investors to spread the risk, Piraeus bought up the entire deal.

Complicating matters further, the largest holding in the company’s investment portfolio was a 30 percent stake in Club Loutraki, a struggling casino operator that owes Piraeus 39 million euros.

According to regulatory filings by Loutraki’s parent company, Queenco, submitted to the London Stock Exchange, the Piraeus loan to Loutraki is unsecured, meaning it is not backed by any collateral. Queenco also says in its filing that Piraeus is a related party to Loutraki.

Piraeus contends that the Loutraki credit is secured and is not a related party transaction. The bank declined to elaborate on why it believed the regulators’ filing was incorrect. The bank also said that its related party loans were insignificant and fully disclosed.

Mr. Rigas argues that Piraeus has merely helped out a troubled client, as other banks have done during Greece’s economic crisis. If anything, he says, it is Mr. Sallas’s willingness to go the extra mile that makes him indispensable.

“In Greece,” Mr. Rigas said, “it’s all about the banks.”

Source: nytimes.com

Clandestine loans were used to fortify Greek bank

(Reuters) – The chairman of one of Greece’s largestbanks and his family took out loans totaling more than 100 million euros to finance an undisclosed stake in the bank, according to audit documents seen by Reuters.

A woman walks out of a Piraeus bank branch in central Athens in this May 30, 2012 file photo. REUTERS-John Kolesidis-Files

By Stephen Grey and Nikolas Leontopoulos

Offshore companies owned by Michael Sallas and his two children paid for shares in the Piraeus Bank, the country’s fourth-biggest, by borrowing money from a rival bank.

Together the shares make the Sallas family the largest shareholder in Piraeus, with a combined stake of over 6 percent. The purchase of these shares has not been declared to the Athens stock exchange by Piraeus.

The loans to Sallas, who was executive chairman of Piraeus Bank until last month and remains its non-executive chairman, raise new questions about the stability and supervision of the Greek financial system at a time when European taxpayers and the International Monetary Fund are bailing out its banks with more than 30 billion euros.

The IMF had no comment on the issue, and a spokesman for the Bank of Greece declined to comment on Sallas’s holdings in Piraeus, citing banking confidentiality guidelines. “Our supervision department cannot comment on specific prudential data available or actions taken with regard to any specific bank as such information is confidential,” he said.

According to audit reports seen by Reuters, most of the money borrowed by companies linked to Sallas was used to buy shares in a Piraeus Bank rights issue in January 2011. The issue was designed to strengthen Piraeus’s capital base.

The disclosure highlights concerns that Greek banks have been borrowing money from each other and using it to meet recapitalization requirements, but not making that clear.

“This (the Greek financial system) is a closed circuit, operating as a system of power with no transparency and effective supervision,” said Louka Katseli, professor of economics at the University of Athens and former Greek minister of economy. “Through triangle deals between banks, businessmen and other banks, capitalization requirements were fulfilled without new money injected.”

Piraeus Bank and Sallas declined to answer specific questions for this story, but offered an interview later this month. On Sunday Sallas issued a statement to the Greek media attacking Reuters and accusing the news agency of “slandering” and “undermining” the bank.

“It is not the first time that I or Piraeus Bank have been the target of attacks,” the statement said. “What should be of concern to all of us in the present situation is the safety and the further strengthening of our banking system.”

Reuters Global Editor for Ethics and Standards Alix M. Freedman said: “Our coverage of Piraeus and of the Greek banking system has been accurate and fair to every person and institution involved.”

In April, a Reuters investigation found that Piraeus had failed to tell shareholders it had rented expensive properties from a network of private companies run by the Sallas family. The bank has sued Reuters for defamation over the story, claiming 50 million euros in damages.

Reuters has also reported allegations of mismanagement at the Proton Bank and at a Cyprus-based bank formerly known as the Marfin Popular Bank that operates in Greece. Proton’s former president and major shareholder, Lavrentis Lavrentiadis, has vigorously denied allegations that he used the bank to loan himself and associates hundreds of millions of euros.

Andreas Vgenopoulos, former chairman of Marfin Popular Bank, now renamed Cyprus Popular Bank, has denied conflicts of interest alleged by a Greek parliamentary inquiry and Cypriot lawmakers.

It was Marfin’s largest then Greek subsidiary, the Marfin-Egnatia Bank (MEB), that issued the loans to the Sallas family. According to two audit reports on Marfin, the loans were ranked among its riskiest exposures, judged both by their shortfall in collateral, which is mainly Piraeus shares, and risk of future losses to the bank.

The two audit reports, from January and May this year, were shown to Reuters by separate and unconnected sources. They were authenticated in interviews with banking sources and officials in Greece and Cyprus.

Internal Marfin auditors said executives at MEB had “failed to act in the best interests of the bank” by granting successive loans to Sallas to buy his own bank shares. By 2011 his investment in those shares, the auditors found, had “dire prospects” and had been made through special purpose vehicles and with no personal guarantees.

The auditors wrote: “Worth noting is that loan approval took place at a time when it was all but clear that the outlook for the Greek banking sector and by extension for Piraeus stock was deeply negative.” The loans were issued “when our Bank was already in a precarious liquidity situation”.

SHARE PURCHASES

According to the records, Sallas first obtained a loan agreement from MEB in May 2009. A facility for up to 150 million euros was signed off by the Marfin group’s Vgenopoulos, then executive vice-chairman. A spokesman for Vgenopoulos and Efthymios Bouloutas, the bank’s chief executive at the time, declined to comment on the loans due to “banking secrecy legal obligations.”

By January last year, according to the first audit report, MEB loans to Sallas companies amounted to 48 million euros. But that month, “another 65 million was used” to purchase shares in Piraeus’s 800-million-euro rights issue.

The Sallas family bought their shares via three separate Cyprus-based companies, according to both audit reports. The purchase brought the family’s total loans to 113 million euros, secured on collateral estimated to be worth less than 30 million euros, based on Piraeus’s recent share price.

The three Cyprus-based companies are Shent Enterprises, which is owned by Sallas and which has 45 million euros in outstanding loans to MEB; Benidver Enterprises, which has 22 million in loans; and KAEO Enterprises, which has 46 million in loans.

Records at Cyprus’ corporate registry show that both Benidver and KAEO were owned by Michael Sallas personally until a month before Piraeus’s rights issue.

Ownership was switched to two Greek companies linked to the family and in turn owned by a single Cyprus company called Avecmac, whose shareholders are anonymous. But MEB audit documents from 2012 seen by Reuters record Benidver as owned by Sallas’ daughter Myrto and KAEO as owned by Sallas’ son George.

Avecmac, contacted through its representative in Cyprus, did not respond to requests for comment. Myrto Sallas declined to comment; George Sallas could not be reached.

FAMILY HOLDINGS

Exactly how many shares Sallas and his family bought in Piraeus last January, and in whose name they were registered, is not clear.

Some indication comes from the number of Piraeus shares pledged by the Sallas companies as collateral for the loans. Those rose by 62 million after the rights issue, bringing the total number of Piraeus shares pledged as collateral to more than 66 million, or around 6 percent of ordinary stock in the bank.

In filings to the stock exchange and in other declarations, Sallas has said he owns around 16 million shares in his name, as well as a total of around 16 million purchased through Shent Enterprises. He has declared no share purchases by his children.

Under Greek and European law, any holding in a public company of more than 5 per cent should be announced publicly. Greek law also requires all company executives “and persons closely associated with them” to make all share transactions public.

Marfin’s auditors, according to their report, regard loans to Sallas and his family as “connected.”

But Kostas Botopoulos, chairman of Greece’s Capital Market Commission, which regulates the country’s public companies, said the decision of who to define as a “person closely associated” was “considered on an ad hoc basis.” There is no specific ruling on whether a spouse or children would fall in that category, he said.

Piraeus Bank released a statement saying the bank would not answer the detailed questions sent to Sallas and the bank due to “civil and criminal cases” between Piraeus and Reuters, and between the bank and a former Piraeus employee “charged with serious crimes.” Piraeus has previously said the former employee had defamed the bank.

“The Bank will refute the allegations in court,” the statement said. “To do otherwise would clearly be in contempt of the proceedings. In the interest of transparency, to defend its reputation and reassure its shareholders, the Bank has provided the Bank of Greece with all the relevant information.”

CAPITAL BASE

The loans to investors in the Piraeus rights issue highlight a bigger concern in the Greek banking sector. Piraeus issued more shares last year to strengthen its capital base, enabling it to score higher in European bank stress tests.

The successful issue, Sallas said at the time, showed “a sign of confidence in Piraeus Bank, the Greek banking system and of course the prospects of the Greek economy.”

But Sallas did not make public the loans he and other shareholders had taken out to help make the rights issue a success.

In all, according to loans disclosed so far, nearly one-fifth of the new capital in Piraeus was raised with financing from other Greek banks – including another 20 million euros or so loaned by MEB to investors, and 70 million euros loaned by the Proton Bank. The Proton loans went through offshore companies in tax havens such as the Cayman Islands.

Proton has since been nationalized after Greece’s money-laundering authority alleged fraud and embezzlement in cases unrelated to Piraeus or MEB.

According to several European banking and accounting experts, if banks loan money to finance major stakes in other banks, then the industry’s regulator, in this case the Bank of Greece, should deduct the same amount from the capital the lending bank claims to hold.

Dr Peter Hahn, a fellow at London’s Cass Business School and an adviser to the UK Financial Services Authority, said that a loan scheme whose only means of repayment was shares in another bank should, under international rules, be treated as if the lending bank was directly purchasing shares in the other bank. “The equity in the lending bank would otherwise be supporting risk of loss in both banks,” he said.

Hans-Peter Burghof, a professor of banking and finance at the University of Hohenheim, Germany, said that billions of euros had been given to the Greek banking system without adequate supervision of the sector. “It’s our money and it has been given without controls. It’s a disaster,” he said.

If banks lent to finance each other’s shares, he said, then “this way you can produce as much equity as you like and make banks as big as you like. It is not real equity.” He likened it to “a kind of Ponzi scheme.”

Burghof said that, whether deemed to be covered by regulations or not, if bank equity was raised in this way, the banks and companies involved should be treated as a consolidated whole. “If the regulator finds out (about loans from one bank to finance share purchases in another), he should discount this equity,” he said.

The European Banking Authority, which is meant to safeguard the stability of the financial system and transparency of markets, generally agreed with that analysis, though a spokeswoman said there may be exceptions in the case, say, of a “financial assistance operation”.

There is no indication in their financial statements that either Proton or Marfin made deductions in their capital levels after their loans for Piraeus shares.

In a statement the Bank of Greece said it does not ordinarily require capital deductions from banks that lend money for the purchase of shares in other unconnected banks.

“European Union law does not prohibit granting loans to an entity (person or organization) in order to participate in a share capital increase of another credit institution,” the bank said. Such a deduction from regulatory capital would only take place if a bank granted loans to buy its own shares, it said.

It added that the disclosure of major stakes (over 5%) in a public company was “indeed a requirement on the stakeholder”. But this was policed by the Capital Market Commission, not the Bank of Greece.

The CMC said that shareholders, in calculating whether they hold 5% or more, should aggregate holdings if they have an agreement to act together.

Source: reuters.com