UPDATE 1-EU Commission says capital controls in Cyprus must be brief

Mon Mar 25, 2013 8:54am EDT

* EU's Barnier: curbs on money movement should be temporary

* EU's Barroso says cannot predict economic impact of bailout on Cyprus

* Cyprus winding down bank as part of deal for aid package

By Robin Emmott and John O'Donnell

BRUSSELS, March 25 (Reuters) - Cyprus may impose controls on the movement of capital but only for a temporary period of time, the European Commission said on Monday, hours after the island sealed a deal to close its second-largest bank in return for international aid.

"Any measures to restrict or limit freedom of movement may only be enacted exceptionally and temporarily and that is what has been requested by the Cypriot authorities," Michel Barnier, the European Commissioner responsible for the 27-member European Union's single market, told a news conference in Brussels.

"This is a restriction on movement that may only last a few days," he said.

Barnier's remarks, where he underscored the need for any restrictions to be as brief as possible, adds to pressure on Cyprus to resume business as normal for its remaining banks as soon as possible.

Banks in Cyprus remain closed and the country is expected to continue some controls on the movement of money when they reopen.

Such controls would normally contravene EU law on free flow of capital, but can be justified on the grounds that they are needed to maintain financial stability, for example.

Early on Monday morning, Cyprus clinched a last-ditch deal with international lenders to shut down its second-largest bank and impose losses on uninsured depositors in return for a 10 billion euro ($13 billion) bailout.

The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.

European Commission President Jose Manuel Barroso said on Monday that despite clinching the deal, it was difficult to predict the island nation's economic future.

"I am confident that the programme will work, but let's be honest. At this moment, we cannot say exactly what the impact is going to be," Barroso told a news briefing.

"It will depend on the level of implementation and the commitment of Cyprus itself."

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