Cyprus keeps limits on money flows

[May 10, 2013]  NICOSIA, Cyprus (AP) -- Cyprus will keep limits on money transfers and withdrawals until it is more confident that its ailing banks will not face a run, the central bank's chief said Thursday.

Panicos Demetriades said the Central Bank of Cyprus wants to eliminate these controls as soon as possible, but it has to first make sure that trust in the banks has recovered sufficiently.

Cyprus introduced strict limits, such as a 300-euro ($400) daily withdrawal limit, in March to forestall a run on its banks after it agreed on a 23 billion euro ($30 billion) rescue package with its euro partners and the International Monetary Fund.

The rescue deal's terms demand that depositors in the country's two biggest banks take major losses on their savings over 100,000 euros. That raised concerns that savers might rush to pull out their money, so the central bank put limits on withdrawals, transfers and overseas payments.

The central bank had always refused to estimate how long the controls would last. Some government officials had optimistically said they would last a matter of weeks, but analysts warn that it can take a long time to lift controls. Argentina and Iceland, for example, have kept them for years.

Some of the limits, such as on bank money transfers, have been eased slightly to help local companies do business. But many others -- such as the daily withdrawal limit -- remain in place.

Demetriades said a rush of withdrawals would put additional strain on the banks that they can hardly afford right now.

"We have to keep in mind the dangers of easing (restrictions) overly quickly," Demetriades told a press conference. "We have to be careful with these relaxations. It's more important to see how trust can be restored in the banking system."

Most of the money raised from the deposit raid, estimated at around 13 billion euros, will go toward recapitalizing the two banks, the Bank of Cyprus and Laiki. Other eurozone countries and the IMF will provide Cyprus with a 10 billion euro loan.

The deal also dictates a major overhaul of the bloated banking system, which was once flush with foreign deposits -- including billions from Russia. At its peak, the banking system had assets worth almost eight times the country's annual national economic output of 18 billion euros.

Laiki, which was hit hardest by its holdings of toxic Greek debt and bad loans, is being wound down and folded into the larger Bank of Cyprus. The Cypriot banks' extensive operations in Greece have also been bought up by Greece's Pireaus Bank.

The Cypriot economy is projected to shrink by 13 percent over the next two years, while unemployment will reach around 15 percent. Some analysts are predicting an even deeper contraction and a higher jobless rate.

Demetriades defended the bailout deal, saying it avoided the liquidation of Bank of Cyprus and Laiki, which would have been even more expensive for the government to handle.

He conceded that the bailout's terms have hurt many savers, although the vast majority -- some 96 percent -- remain unaffected. Large savers at Laiki will lose most of their money over 100,000 euros, while depositors at Bank of Cyprus could lose up to 60 percent.

Demetriades said about 70 percent of Bank of Cyprus deposits that have taken a hit belonged to foreign residents, meaning that Cypriot households and businesses remained untouched "to a greater degree than what was perhaps anticipated."

The bailout deal also foresees the eventual sale of most Cyprus' gold reserves to raise some 400 million euros which will go toward paying down the creditors' loan. Demetriades said the Central Bank, which controls the gold reserves, hasn't made a final decision on such a sale.

[Associated Press; By MENELAOS HADJICOSTIS]

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