Greek Bank Head Took Secret Loans to Finance Bank Stake

However, the money did not come from outside the Greek banking system, which it should have in order to strengthen Piraeus's capital reserves. Instead, with the money having been borrowed from another Greek bank—and, according to records, secured by collateral that was mainly made up of shares in Piraeus—the effect may have been merely to move money from one column to another in the greater ledger of the Greek banking crisis. The largest then-Greek subsidiary of Marfin Popular Bank (now renamed Cyprus Popular Bank), the Marfin-Egnatia Bank (MEB), is the entity that made the loans to the Sallas companies.

According to internal Marfin auditing documents, Marfin's auditors had 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. As of 2011, the auditors said, those investments by Sallas had "dire prospects" and, further, had been made through special purpose vehicles and with no personal guarantees.

In the documents, the auditors said, "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." They also said the loans were issued "when our Bank was already in a precarious liquidity situation."

Another point at issue is the fact that MEB failed to deduct the loans from its balance sheet, which, according to a number of European banking and accounting experts, should have been done by the Bank of Greece as the industry's regulator.

A loan from one bank to another that is based solely on shares in the borrowing bank, according to Peter Hahn, a fellow at London's Cass Business School and an adviser to the U.K. Financial Services Authority (FSA), should be treated, under international rules, as if the lending bank directly purchased shares in the borrowing bank. He was quoted saying, "The equity in the lending bank would otherwise be supporting risk of loss in both banks."

Elsewhere in Europe, Germany continued to stick to its guns on the question of whether the European Stability Mechanism (ESM) and the fiscal pact for budget discipline, to be signed by all members of the European Union, satisfy the requirements of its constitution.

The Constitutional Court announced Monday that it would not announce a decision on the measures' constitutionality until Sept. 12. The ESM was originally scheduled to go into effect on July 1. However, it must be ratified by countries representing 90% of its capital, 700 billion euros, before it can be implemented; therefore it cannot proceed without Germany.

At issue is whether the ESM—and the fiscal pact as well—violate German law by taking away responsibility for the country's budget from Parliament. In a public hearing last week, the court's president, Andreas Vosskuhle, said that the court could opt for a "very thorough summary review," which could take up to three months.