Cyprus will “gradually” relax capital controls, including restrictions on deposit withdrawals, to avoid outflows from the country’s banking system, Central Bank of Cyprus Governor Panicos Demetriades said.
“Eliminating restrictions too abruptly can lead to disruptive outflows and liquidity problems in the banking sector,” Demetriades said in a speech in Nicosia today, according to a transcript of his comments e-mailed by the central bank.
Cyprus agreed on March 25 to a 10 billion-euro ($12.9 billion) loan from the euro area and the International Monetary Fund in return for measures including a tax on bank deposits of more than 100,000 euros. Those concessions were demanded by creditors in a bid to shrink the country’s banking sector, and have led to Cyprus needing to impose capital controls as it wound down its second biggest lender Cyprus Popular Bank Pcl.
The country needs to consider the trade-off between freeing payment flows and preserving financial stability and will lift restrictions based on close monitoring of trends and of the liquidity buffers of lenders, Demetriades said.
Capital controls are Cyprus’s biggest short-term problem and the country is working “to steadily relax” them while Cypriot lenders are showing resilience “under the circumstances,” Finance Minister Haris Georgiades said in a separate speech today in Nicosia.
“I don’t believe in prolongation” of the controls, Georgiades said. Bank of Cyprus needs to exit its restructuring “urgently” as it will be difficult to end the controls until then, he added.
Completion of the restructuring of the country’s banking sector, including Bank of Cyprus, “is expected to lead to a resumption of confidence and a gradual stabilization of funding,” Demetriades said. “As soon as the banking system is seen as having stabilized, confidence could return sooner, allowing for the earlier removal of controls and a faster recovery of economic activity.”
An independent fair value assessment of the assets and liabilities of Bank of Cyprus and Cyprus Popular Bank will be conducted by end June. That will be used to determine whether additional capital is required to ensure a core Tier 1 ratio, a measure of financial strength, of 9 percent, Demetriades said.
Any other of the country’s commercial or co-operative lenders who need to be recapitalized will receive private or public funds and uninsured depositors are not expected to participate, Demetriades said.
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