Cyprus readies capital controls to avert bank run

By Michele Kambas and Costas Pitas

NICOSIA (Reuters) - Cyprus is finalizing capital control measures on Wednesday to prevent a run on the banks by depositors anxious about their savings after the country agreed a painful rescue package with international lenders.

Cypriots have taken to the streets of Nicosia in their thousands to protest against a bailout deal they fear will push their country into an economic slump and cost many their jobs.

European leaders said the deal averted a chaotic national bankruptcy that might have forced Cyprus out of the euro.

With banks due to reopen on Thursday, Finance Minister Michael Sarris said he expected the control measures to be ready by noon (1000 GMT) on Wednesday: "I think they will be within the realms of reason," he said, without going into details.

"Banks will open on Thursday ... We will look at the best way to limit the possibility of large sums of money leaving, and not imposing punitive conditions on the economy, businesses and individuals," Sarris said in a Cyprus television interview.

The central bank governor said earlier that "loose" controls would apply temporarily to all banks. Earlier, the finance minister said they could be in place for weeks. Banks have been shut since final bailout talks got under way in mid-March.

Russia, whose citizens have billions of euros in Cypriot banks, cautioned Nicosia against imposing onerous controls on healthy banks.

"If there are such measures, this will not foster trust but only provoke additional problems for participants, depositors," Russian Finance Minister Anton Siluanov, in South Africa for a summit of the BRICS emerging powers group, told reporters late on Tuesday.

State-controlled Russian bank VTB has a subsidiary in Cyprus, Russian Commercial Bank, which has not been affected by the bailout deal.

Siluanov cautioned that Russian willingness to restructure and extend a 2.5 billion euro loan to Cyprus in 2011 would depend on the island's decision on capital controls.

"We will discuss (restructuring of the loan) in the context of the decisions the parliament adopts," he said. "We are prepared to discuss within these parameters."

POPULAR ANGER

The terms of the 10-billion euro ($13-billion) rescue with the European Union, International Monetary Fund and European Central Bank have stirred popular anger within Cyprus at the country's partners in the EU, notably Germany, the bloc's main paymaster and fiercest advocate of austerity.

On Tuesday, up to 3,000 high school students protested at parliament, in the first major expression of popular anger since the bailout was agreed in the early hours of Monday morning reached in Brussels. The deal largely side-stepped parliament, and has triggered opposition calls for a referendum.

"They've just got rid of all our dreams, everything we've worked for, everything we've achieved up until now, what our parents have achieved," said one student, named Thomas.

Outside the central bank, about 200 employees of the country's biggest commercial lender, the Bank of Cyprus, demanded the resignation of the central bank governor, Panicos Demetriades, chanting "Hands off Cyprus" and "Disgrace".

Dimos Dimosthenous, who has worked at the Bank of Cyprus for over 30 years, said: "The bank is being driven to closure. That will be the end. Our jobs, our rights, our welfare funds will be lost, and Cyprus will be destroyed."

RESIGNATION

Under the terms of the bailout, the second largest lender, Cyprus Popular Bank, is to be shut down and accounts of under 100,000 euros will be moved to the Bank of Cyprus. Bigger accounts at both banks will be frozen.

Government officials have estimated that these larger depositors, many of them wealthy foreigners including Russians, could lose around 40 percent of their cash.

By protecting state-guaranteed deposits of up to 100,000 euros, the bailout reversed a previous deal struck on March 16 that would have imposed a levy on small and large depositors, which had infuriated Cypriots and was vetoed by parliament.

Many Cypriots say they do not feel reassured by the new deal, however, and are expected to besiege banks as soon as they reopen after a shutdown that began over a week ago.

The long closure of the banks has hurt business, according to Andreas Hadjiadamou, president of the Cyprus Supermarkets Association, who said consumer confidence had "hit the floor".

Maria Benaki, who runs a family silverware business on Nicosia's biggest shopping street, said she had not had a customer in days.

"The situation is dire," she said. "What will happen at the end of the month when I need to pay my bills?"

(Additional reporting by Agnieszka Flak in Durban, Douglas Busvine and Steve Gutterman in Moscow, Laura Noonan and Karolina Tagaris in Nicosia; Writing by Giles Elgood and Matt Robinson; Editing by Will Waterman)

Source: http://news.yahoo.com/cyprus-readies-capital-controls-avert-bank-run-090603283--finance.html

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