About the Case

The international arbitration case that is pending against the Republic of Cyprus is named Theodoros Adamakopoulos and Others v. Republic of Cyprus (ICSID Case No. ARB/15/49).   So far, it is brought on behalf of 954 victims (“Claimants”) of the unprecedented “bail-in” (confiscation) of creditors of two Cypriot banks pursuant to a scheme that Cyprus began implementing in March 2013 known as “Plan B.”  953 of the Claimants are Greek; one is from Luxembourg.  947 are natural persons; seven are legal entities.  284 were depositors in the banks; 679 held bonds issued by the banks (nine were both depositors and bondholders). 

All Claimants were creditors of one or two Cypriot banks, Cyprus Popular Bank (also known as Marfin Popular Bank or Laiki Bank) (“Laiki”) and Bank of Cyprus.  Both banks had substantial operations in Greece and both were forced to sell them by Cyprus, on the same day, at fire-sale prices.  Both suffered similar losses as a result, in excess of €1 billion each, which resulted in their insolvency.  Ultimately, these losses were imposed on the Claimants.  All Claimants saw their holdings “bailed-in” (i.e. confiscated), and all received this treatment because they were foreign investors.  They all bring the same discrimination, unlawful expropriation, fair and equitable treatment, and full protection and security claims under the largely identical provisions of two of Cyprus’ bilateral investment treaties, the Agreement between the Government of the Hellenic Republic and the Government of the Republic of Cyprus on Mutual Promotion and Protection of Investments (the “Greece BIT”) and the Agreement between the Republic of Cyprus and the Belgo-Luxemburg Economic Union on the Reciprocal Promotion and Protection of Investment and Exchange of Letters (the “Luxembourg BIT”) (together, the “BITs”). 

The drama that unfolded in Cyprus began with a classic BIT scenario:  a pro-foreign investment business climate ended abruptly when a new communist regime came to power, which in the midst of the world financial crisis raised wages and pensions, dramatically increased spending, creating a sovereign debt crisis.  The regime also was openly hostile to the banking sector and the country’s financial services business model built, by its predecessor government, on foreign investment.

An Unprecedented Plan

But while the lead-up to Plan B was classic, the decisions Cyprus made as part of Plan B itself were wholly unprecedented and, in fact, so arbitrary and discriminatory that they are unlikely to ever be repeated by any country in the world.  Indeed, as soon as Plan B was announced, Mario Draghi, President of the European Central Bank and the person with primary responsibility for the financial stability of the entire European Banking Union, rushed to publicly state:  “[L]et me stress that Cyprus is not a template! . . . Cyprus is not a turning point in euro area policy.”  Similarly, one of Cyprus’ own former Finance Ministers has stated that the Cyprus bail-in:

was unique, not only in the history of banking in Europe, but also worldwide.  The bail-in tool applied in Cyprus had no resemblance to the EU bail-in directive . . . or any measures applied . . . either before or after the Cyprus bail-in.  The 2013 Cypriot bail-in and resolution measures were an international experiment.

To the Minister’s and Draghi’s point, no bail-in was implemented in Germany, the United Kingdom, Ireland, Greece, or Spain when, before Cyprus, those countries needed rescue packages; nor were depositors bailed in, after Cyprus, as part of the recent rescues of several banks in Italy.  Even Dutch Finance Minister Jeroen Dijsselbloem, who presided over the Cyprus bail-in as Eurogroup President, did not confiscate depositors’ life savings, when it was his turn to rescue SNS Reaal Bank in the Netherlands.  The Cyprus experience, it thus appears, will not be an example for future action—except, perhaps, an example of how not to do it.

What Was “Plan B”?

Cyprus’ Plan B was so unique because of the combined effect of its five key elements.  Cyprus:

  • was given a €10 billion loan by the European Commission, the European Central Bank, and the International Monetary Fund (together, the “Troika”) to support its economy and banks (including €1.5 billion for the domestic cooperative banks) but on the condition that none of the funds be used to recapitalize Laiki or Bank of Cyprus;
  • wrote off 47.5% of the value of deposits with the Bank of Cyprus, and 99-100% of the value of its bonds, and the bonds and deposits with Laiki;
  • forced the banks to sell their Greek operations at a huge (€3.4 billion) loss, which dramatically increased the burden placed on the banks’ bailed-in creditors;
  • shifted the burden to safeguard depositors with savings up to €100,000 from Cyprus’ own deposit guarantee scheme to depositors with savings over €100,000, which further increased their burden; and
  • forced the Bank of Cyprus to provide €3.8 billion in collateral for, and ultimately repay, a multibillion euro loan to Laiki’s biggest creditor, Cyprus’ own Central Bank, which gave it a higher ranking than allowed under Cyprus’ bankruptcy rules.

Discriminatory and arbitrary treatment

It is evident that these measures were arbitrary and discriminatory, and there is no secret about it.  Plan B openly exempted from the bail-in hundreds of domestic “charities” (like the Cyprus Drivers Association, Organization “Dance Cyprus,” and Larnaca-Famagusta Animals and Birds Association) and various other domestic depositors, as well as all depositors with Cyprus’ cooperative banks, which are well known to have an entirely domestic depositor base.  While these exemptions for domestic depositors, which increased the bail-in amount for non-residents, are arbitrary and discriminatory on their face, Plan B’s distinction between savings of up to €100,000 and those above €100,000 is hardly more subtle.  The Governor of the Central Bank of Cyprus, Panicos Demetriades, had pleaded for a carve-out for depositors in the first category because, as he stated, most Cypriots fall into that category.  He has also openly admitted that the objective of bailing-in only deposits over €100,000 was specifically to “impose losses on foreign investors . . .” (emphasis added).  He also proudly reported as the “more positive side” of the bail-in, “70% of the value of deposits affected concerned foreign residents, thus leaving the Cypriot households and businesses unaffected . . .” (emphasis added).

Even if Cyprus had been more circumspect about its intentions (which it was not), the facts in this case speak for themselves.  Unlike a predecessor plan known as “Plan A” (which would have imposed modest levies (less than 10% in all cases) on all deposits in Cyprus above €20,000), Plan B limited the haircut to Laiki and Bank of Cyprus only, which had the effect of increasing the disproportionate impact on foreign investors.  Foreign depositors represented one-third of all deposits in Cyprus.  But the proportions of non-resident deposits at Laiki (48%) and at Bank of Cyprus (57%) were far greater than the national average; and most of the banks’ bonds had also been sold to that same depositor base.  As a result, Cypriots contributed a total of only one-third to the bail-in, even though they represented two-thirds of depositors in Cyprus.  In other words:  two-thirds of the bailed-in funds came from foreign depositors – double what they would have contributed, had everyone been treated equally – while local depositors paid only half of their proportionate share of deposits. This means that the Claimants contributed twice as much as local depositors.


Furthermore, the measures that were part of Plan B also constituted expropriations in that they reduced the value of the Claimants’ investments and infringed upon their rights.  Apart from the haircut itself, which is a direct infringement on the Claimants’ property rights, the value of their investments was dramatically reduced by the other components of Plan B, both when viewed by themselves and certainly when their effects are combined.

The Greek assets sale. The Governor of the Central Bank of Cyprus, who forced the banks to undergo “resolution” (restructuring) and then forced them to sell all their assets in Greece at a €3.4 billion loss, has admitted that when the Central Bank placed them in resolution and when the assets were sold, neither bank was actually insolvent. On May 9, 2013, he stated:

We have never considered the Popular Bank of Cyprus to be insolvent.  Popular Bank of Cyprus was always solvent.

On June 4, 2013, he admitted before the Ethics Committee of the Parliament:

[T]he recapitalization needs of the banks were to cover losses projected for the next three years.  The losses had not been realized in December [2012].  The banks were solvent . . . The banks were solvent.  Statistically, at that moment they were solvent.  They had positive capital indices (emphasis added).

Governor Demetriades further admitted that the disposal of the banks’ Greek branches “compelled them . . . to become insolvent” (emphasis added).  It is thus clear that there was, in reality, no need at all to drive the banks into resolution, and it was in fact extremely harmful to do so.

Demetriades’ predecessor, former Governor Athanasios Orphanides, describes his successor’s actions in no uncertain terms:

[T]he selling of the branches in Greece, which was agreed and signed by the CBC, without the consent of the legal owners, . . . can be considered theft.  Theft of billions of euros (emphasis added). 

Exempting the “insured.”  A further destruction of the value of Claimants’ investments was the exemption of so-called “insured” depositors and the transfer of liability for Laiki’s “insured” depositors to the Bank of Cyprus.  This was tantamount to the provision of deposit insurance to depositors with up to €100,000 in savings, not through the government’s Deposit Protection Scheme (“DPS”) but with funds belonging to Bank of Cyprus’ unsecured creditors like its uninsured depositors and junior bondholders.  It violated the European DPS rules, which provided for deposit insurance coverage after deposits became “unavailable,” not by passing on the burden to a bank’s other creditors.  Giving “insured” depositors a de facto super-priority over other creditors was also inconsistent with the pari passu principles of Cyprus’ bankruptcy law and its constitutional equal treatment guarantee and ban on arbitrariness.

Again, the record is perfectly clear on this point as well because the Central Bank of Cyprus openly admitted shortly after it implemented Plan B that the purpose of this measure was to avoid a multi-billion euro liability for Cyprus and its underfunded DPS:

[The] immediate activation of the Deposit Protection Scheme, which had only €125 million in funds . . . would have resulted in an obligation for the Republic of Cyprus to repay the €6,4 billion of insured deposits in Laiki Bank . . .

The transfer of the obligation to cover “insured” depositors from the DPS and the state to the Bank of Cyprus added another €4.2 billion to the tab for the bailed-in unsecured creditors, like the Claimants here.

Transfer of ELA.  Finally, Plan B compelled Bank of Cyprus to assume Laiki’s indebtedness to its single largest creditor, the Central Bank of Cyprus, from which Laiki had borrowed €9.6 billion as temporary liquidity support (ELA).  Plan B required the Bank of Cyprus to put up additional security for the unsecured portion of the ELA liability (€3.8 billion) and then repay the entire amount with priority over all other creditors.  By elevating the Central Bank from a partially unsecured to a secured creditor, Cyprus placed its own Central Bank in a far better position than other creditors of Laiki in violation of the pari passu principle, the equal treatment requirements of the Cyprus Constitution, and the “no-creditor-worse-off” principle under Cypriot law.

Due process.  All the above measures were pushed through in haste and without due process, with a total lack of transparency, and without any notice or opportunity for the Claimants to be heard.  While they were presented as emergency measures (for which there was supposedly no alternative), internal documents show – and one of the chief architects of Plan B, the Governor of the Central Bank of Cyprus, later admitted – that the measures had been prepared for many months; and there were, in fact, several viable alternatives available.

Proportionality.  President Anastasiades wrote a letter in June 2013 to the Troika, in which he presented two better alternatives for Plan B.  And while an admission that better alternatives existed alone is sufficient for Cyprus’ expropriatory measures to fail the proportionality test, there were, in fact, even more viable plans to rescue Cyprus and its banks from their economic troubles:  first, a fully finalized Memorandum of Understanding agreed upon in November 2012 (the “November MOU”), which was not discriminatory, did not provide for any depositor bail-in, was accompanied by a bond-buying program designed to provide fair compensation to bondholders for their losses, and was designed to save both banks; and second, Plan A, agreed upon with the Troika in mid-March 2013, which did not envisage a depositor or bondholder bail-in but imposed a modest levy across all Cypriot banks’ depositors, also did not discriminate against foreign investors, and was designed, like the November MOU, to save both Laiki and the Bank of Cyprus.  Cyprus, however, chose not to implement either of these alternatives, but to place instead an excessive 47.5/99-100% burden primarily on a narrow group of foreign investors. Plan B thus clearly was not a less burdensome option nor the least restrictive of the Claimants' rights, as the proportionality principle requires.

Fair compensation.  Not only were Cyprus’ expropriatory measures disproportionate and/or adopted by decree without any due process of law, they also went wholly without compensation.  Again, several government officials at the highest level, who themselves played key roles before and during the creation and implementation of Plan B, have openly acknowledged the propriety of providing compensation to both bondholders and depositors, and severely criticized the expropriatory measures at issue here.  First, with respect to the depositors, one of Cyprus’ former Finance Ministers admits:

I am firmly convinced that the bail-in amounted to an organized state robbery.  The 29 March 2013 Decree and the package of government measures . . . of which it formed part amounted to the Cypriot government legislating the stealing of depositors’ money.  In my view, such acts breach fundamental human rights, more specifically, the right to property.

The Minister rightfully concludes that Cyprus “should acknowledge that it stole the depositors’ money and commit itself to make good the loss to depositors” (emphasis added).

Ironically, even the Central Bank of Cyprus itself, which is largely responsible for Plan B, admitted that Plan B would be illegal.  On February 11, 2013, responding to rumors about a possible depositor bail-in, the Central Bank of Cyprus issued this statement:

[T]he Central Bank of Cyprus wishes to stress that any action aimed at reducing, depriving or restricting the property rights of depositors, contradicts the provisions of the Constitution of the Republic of Cyprus and of Article I of the First Protocol of the European Convention of Human Rights, provisions which protect the right to own property and which are crucial to the functioning of a free market economy. Hence, any suggestion to the contrary is not only legally unfounded but it cannot merit serious consideration.

Nonetheless, it did just what it claimed it could not do when it adopted Plan B.

As for bondholders, Cyprus’ prior admissions are equally clear.  It is essentially undisputed that the government – and solely the government – is to blame for the bank bail-in, which could easily have been avoided.  The Central Bank of Cyprus admitted in an October 25, 2012 memo to the Ministry of Finance that the banks’ capital needs were “not as a result of risky commercial strategies” of any of the banks.  The Ministry of Finance has gone even further and admitted that “[t]he main reason for the problems of the two Cypriot banks was in effect sovereign losses that resulted from a number of wrong actions / decisions” involving the Cypriot government and the Central Bank of Cyprus.  It expressed as the Cypriot government’s official position that Cyprus should compensate bondholders by buying up the bonds and exchange them for a five-year government bond because “it is not fair that the [bond]holders should now suffer a haircut because of the wrong decisions” of the government (emphasis added).  Tellingly, the government was realistic and recognized that a failure to provide compensation to bondholders would result in “massive lawsuits” against, inter alia, the Central Bank of Cyprus “and probably the Government,” and it made the quite revealing assessment that those claims could be decided “in the vast majority of cases in favour of the amounts [claimed] and thus at the end of the day, the impact on the state will not be different from the proposed arrangement.”

Unfair and Inequitable Treatment

Not only was Cyprus’ conduct discriminatory, arbitrary, and disproportionate to any purported need (which suffices to conclude that Cyprus acted unfairly and inequitably), but the measures to implement Plan B were also not enacted pursuant to a stable legal regime and lacked transparency.  Well-established legal principles of the Cypriot Constitution and bankruptcy laws – as well as the very bail-in law that had been adopted just days or weeks earlier – were flippantly ignored.  Official Cypriot government acts left ordinary investors in the dark as to the fate of their savings.  The announcement of the November MOU and subsequent statements dispelling rumors had assured investors their deposits would be unharmed; trustingly, the Claimants left their funds in the Cypriot banks.  In fact, the Cypriot government specifically said they would not do just what they did – take depositors’ money.  President Anastasiades, just before his election, stated:

I want, in the most clear and categorical manner, [to] commit myself and pledge to my Cypriot compatriots but also to foreign investors, as well as convey a clear message to the entire international audience that, as president, I, Nicos Anastasiades, will not sign any memorandum that contains any provision for a haircut on bank deposits (emphasis added).

Parliamentarians from several parties echoed those sentiments, stating, “We have to pass the message to foreigners that we will never accept . . . to be dishonest against people who have trusted our banking system.”  Further, to this day, the public knows almost nothing about the period between the announcements of the November MOU and of Plan A four months later.  In addition, studies to analyze the health of the banks were either criticized for their lack of transparency or have never been released.  Cyprus’ conduct thus violated the Claimants’ rights under the fair and equitable treatment clause of the BITs to non-discrimination, non-arbitrariness, transparency, due process and a stable legal regime.  It also demonstrates a lack of good faith on the part of the Cypriot government.

Failure to Provide Full Protection and Security 

Cyprus further failed to provide full protection and security to Claimants by failing to ensure a legal and regulatory framework that would protect the Claimants’ investments.  On the contrary, Cyprus evinced an utter lack of due diligence and care necessary to fulfill its treaty obligations.  The rejection of the November MOU and Plan A, as well as an abdication of responsibilities to maintain the DPS (which Cyprus had boasted about to entice investors to Cyprus in the first place), all underscore Cyprus’ failure to abide by its treaty obligations.

Cyprus’ Admissions of Guilt

The evidence is thus overwhelming that Cyprus was aware, and agreed, that its actions vis-à-vis the Claimants and other foreign investors were wrong, as no less than six of Cyprus’ own documents show:  

(1)  the government’s Position Paper acknowledging that bondholders deserve compensation and expressing a willingness to provide it;

(2)  the Central Bank’s letter stating that any type of depositor haircut violates the internationally and constitutionally guaranteed protection of property and that any suggestion otherwise cannot be taken seriously;

(3)  President Anastasiades’ talking points for Chancellor Merkel expressing the government’s position that a haircut on depositors is “a very bad idea”;

(4)  the President’s letter to the Troika expressing remorse over Plan B and admitting that two other solutions, not involving a bail-in, would have been better in Cyprus’ view;

(5)  the former Central Bank Governor’s emphatic rejection of the forced sale of the banks’ Greek operations as theft of billions of euros; and

(6)  the Minister of Finance’s furious critique characterizing both the bail-in and the transfers of ELA and deposit insurance liabilities as organized state robbery—all of which show that this was not rocket science for Cyprus to figure out, and that this insight had reached the highest echelons of Cyprus’ elite.

To the extent there is any remaining doubt as to Cyprus’ guilty state of mind, an email exchange between the IMF and the Law Office of the Republic of Cyprus may serve as conclusive evidence of malice on Cyprus’ part.  On March 21, 2013, after Plan A had been rejected, Ms. Katja Funke of the IMF sent an email message to the Law Office, requesting “more clarity on the legal obstacles related to applying a deposit levy to non-residents” and whether there is a “problem . . . stemming from bilateral investment treaties.” The department head Dr. Constantinos Lycourgos responded:

The application of a deposit levy, particularly to non-residents, would be legally problematic in a number of ways.  Bilateral agreements, as you rightly mention, are one of the problems we have to face.  Cyprus has Bilateral Investment Treaties (BITs) with 26 countries . . . which provide, inter alia, for the case of nationalisation and expropriation and measures having equivalent effect . . . Such expropriation can only be made, and measures having equivalent effect to expropriation can only be taken, “against fair and equitable compensation . . .”  Given the breadth of the relevant clause (“measures having equivalent effect to . . . expropriation”), and the manner in which such clauses in BITs have been interpreted in the awards of arbitral tribunals such as the International Centre for Settlement of Investment Disputes (‘ICSID’), it seems highly likely that the deposit levy contravenes these clauses (e.g., in Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (ICSID Case No ARB/09/02), ICSID found that Sri Lanka had misappropriated Deutsche Bank’s assets, in breach of a BIT between Germany and Sri Lanka, by preventing it (by means of a Supreme Court Order and letter from the Central Bank) from enforcing a debt due to the bank) . . . (emphases added).

It is evident that Cyprus, with a guilty conscience, chose an “instrumentalist” approach to its obligations under international law, as its response to another “legal obstacle” demonstrates.  On March 13, 2013, Cyprus’ Ministry of Finance raised with the European Central Bank and the European Stability Fund the legal problem that “introducing a levy on non-resident deposits in Cyprus would be in contravention of its bilateral obligation not to impose any tax on interest income in accordance with an applicable treaty.” The government then downplayed the risks associated with violating international law because most non-residents who would suffer from the levy would not be able to invoke any treaty protection since the jurisdictions where they reside have no double tax treaties with Cyprus.

This cynical, instrumentalist view of its duties under international treaty law – to be followed only when there is a risk of enforcement – may explain how Cyprus ended up with Plan B, after the government’s top legal advisors made clear, in no uncertain terms, that Plan B’s haircut on foreign investors was legally problematic and highly likely to contravene its BITs. The largest group of foreign investors in Cyprus were Russians, and they had no BIT with Cyprus to protect them against expropriation or discrimination.  Thus, in Cyprus’ thinking, it could expropriate their money with impunity!  That makes Plan B, effectively, the cheapest possible (forced) loan available in the international markets at the time. If justice prevails and the Claimants are awarded full compensation, with interest for all the years they were deprived of their property, and with a just and equitable award for moral damages for two of the Claimants, Cyprus will still come out on top because it cannot be forced to repay the Russians.  This Tribunal’s award will be only a small price to pay for the multi-billion euro loan amount it unlawfully “borrowed” from its foreign investors.