Cypriot President Nicos Anastasiades said creditors must urgently provide a long-term solution to restore Cyprus’s biggest bank to health so that capital controls can be lifted and “devastating” effects to the economy averted.
In a letter to European Commission President Jose Manuel Barroso dated June 6, Anastasiades said that a financial rescue package from the euro area and the International Monetary Fund imposed losses on bank depositors “without careful preparation,” creating “pressing issues that need to be addressed.” A significant number of Cypriot firms have lost their working capital, he said in the letter posted on website newsit.com.cy and confirmed by the president’s office.
Cyprus agreed on March 25 to a 10 billion-euro ($13.4 billion) bailout 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 led to Cyprus imposing capital controls as it resolved its second-biggest lender, Cyprus Popular Bank Pcl.
“Artificial measures such as capital restrictions may seem to prevent a bank run in the short term but will only aggravate the depositors the longer they persist,” Anastasiades said. “Rather than creating confidence in the banking system they are eroding it by the day. Maintaining capital restrictions for a long period will inevitably have devastating effects on the local economy.”
Bank of Cyprus Pcl’s absorption of parts of Cyprus Popular, including a 9 billion-euro liability from the central bank’s Emergency Liquidity Assistance program, has created a “mega-systemic bank,” according to Anastasiades. The success of Cyprus’s bailout program depends on the emergence of a “strong and viable” Bank of Cyprus, he said.
One possible solution is to convert Cyprus Popular’s ELA debt into long-term bonds that can be transferred into a “separate vehicle,” he said. Another would be for euro-area finance ministers to reverse the decision to merge Bank of Cyprus and Cyprus Popular.
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