Cyprus bank probe to cover Popular, central bank says

NICOSIA Mon Apr 8, 2013 6:38am EDT

A man walks past a branch of Bank of Cyprus in Nicosia March 31, 2013. REUTERS/Yorgos Karahalis

A man walks past a branch of Bank of Cyprus in Nicosia March 31, 2013.

Credit: Reuters/Yorgos Karahalis

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NICOSIA (Reuters) - Cyprus's central bank confirmed on Monday it will extend an inquiry into the banking crisis that has crippled the island to fully cover Cyprus Popular Bank, nationalized last year because of heavy losses from Greece.

A central bank-commissioned probe leaked last week made reference to Popular's purchase of Greek government bonds, while focusing on the island's largest commercial bank, Bank of Cyprus.

Central Bank of Cyprus Governor Panicos Demetriades told lawmakers on Monday the inquiry would move on to Popular and its Greek bond buys.

"It is expected to be completed in the next few months," he said.

Cyprus agreed a 10 billion euro bailout deal from the European Union and International Monetary Fund designed to untwine it from a banking sector that has all but crumbled in the past month.

In stark contrast to previous euro zone bailouts, depositors with more than 100,000 euros in Cyprus being forced to pay to recapitalize their banks, badly hit by their exposure to Greece.

Despite the onerous terms, Cyprus had no other option and any discussion of leaving the euro zone was out of the question, Finance Minister Harris Georgiades said at the same meeting of lawmakers.

"I would like to make this clear: There is no Plan B... An exit from the euro, and I underline this, would equal a much bigger haircut (loss) not only on big depositors but on the entire economy," he said. "The living standards of every citizen would go back decades."

CASH TRAIL

Cypriot banks were shut down for two weeks. They reopened in late March to currency controls and a cash withdrawal limit of 300 euros per day.

Fuelling public disquiet are disclosures of major shifts of capital out of Cyprus days before the island's banking system was effectively locked down on March 15.

Demetriades, speaking to the financial affairs committee of parliament, said he had sent to another committee, the ethics committee, a list of major transfers. That list was due to be discussed on Tuesday.

"It details outflows from the two banks, of over 100,000 euros," Demetriades said.

Cyprus will wind down Popular, with some of its assets transferred to Bank of Cyprus. Bank of Cyprus will also slap large depositors with heavy losses to pay for its own recapitalization needs.

Demetriades said a clear picture of Bank of Cyprus's requirements would be known by the end of June.

The first installment of the investigation, by consultants Alvarez and Marsal, drew criticism that it did not focus on the role of Popular in the crisis, which was kept on a funding lifeline for months as Cyprus attempted to negotiate terms of a bailout.

When the European Central Bank threatened to pull its aid to Popular, Cyprus buckled and agreed to accept tough bailout terms.

The inquiry would focus on the purchase of Greek bonds and expansion strategies pursued by Popular in previous years, Demetriades said.

(Writing by Michele Kambas, Editing by John Stonestreet and Andy Bruce)

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