UPDATE 2-Cyprus says rise in bailout costs won't affect banks or depositors

Fri Apr 12, 2013 2:09pm EDT

* Cyprus says deteriorating economy drove bailout needs up

* Central bank governor comes under growing pressure

* C.bank board hit by resignations, adding to pressure on governor

By Karolina Tagaris and Michele Kambas

NICOSIA, April 12 (Reuters) - Cyprus said on Friday that an increase in the cost of its total bailout package to about 23 billion euros would not lead to more money being taken from depositors in the country's banks.

Cyprus has been thrown into economic turmoil. The terms of its bailout have forced massive losses on depositors at two of its biggest banks - one of which will be wound down altogether. The government is also piling pressure on the central bank governor to quit.

The euro zone member says its financing needs under its EU/IMF bailout have risen to around 23 billion euros from an original 17.5 billion euros, because its deteriorating economy will depress its revenues.

The island looks set to receive 9 billion euros from the euro zone's bailout fund and 1 billion euros from the IMF, and it will raise the remaining 13 billion euros itself.

Projections from last November, however, when the previous communist-led administration concluded a draft memorandum of understanding on a bailout, had estimated the island would only need 17.5 billion euros in total.

"This (increase) in no way means new recapitalisations of the banks are planned, nor an additional burden on depositors," government spokesman Christos Stylianides said.

He said a "rapidly deteriorating" banking sector and public finances meant the country's financial need had increased since November.

"It was an irresponsible, cowardly and indecisive failure to sign the memorandum at that time," said Stylianides, a spokesman for the centre-right government which took office on Feb. 28.

Cyprus and the European Union have agreed in principle on how it will provide its 13 billion euro contribution to the bailout package.

Cyprus is winding down its second-largest lender, Popular Bank, and transferring some of its assets to Bank of Cyprus, whose own depositors will suffer heavy losses from a restructuring and recapitalisation of the sector.

The country's contribution also includes selling 0.4 billion euros worth of gold - most of its reserves, and 1.4 billion euros in privatisations.

UNDER PRESSURE

An investigation into the demise of the two biggest banks has increased the friction between the government and Central Bank Governor Panicos Demetriades, appointed by Cyprus's former communist administration in May 2012.

On Wednesday, parliament said it would launch an inquiry into whether Demetriades withheld information from legislators in an investigation into the island's now-collapsed banking system.

That decision drew a scathing response from ECB President Mario Draghi, who in a letter to the Cypriot president said it was effectively a procedure to sack the governor, just days after the government withdrew the appointment of his deputy and right-hand man, Spyros Stavrinakis.

In the latest sign of tension between the two bodies, two central bank board members, Andreas Matsis and Harris Achiniotis, have stepped down, a spokeswoman for the bank said on Friday, without giving reasons for their resignation.

A source close to the matter said a third member had also handed in his resignation, reducing the six-person board to two, including Demetriades.

Executive power on the central bank board rests with the governor, so the resignations are not expected to affect decision-making at the bank, although they add to the pressure on Demetriades himself to quit.

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Comments (2)
bertanderson wrote:
Seriously, how can these countries continue to ask for more bailout money. It’s just going to be wasted away. With all the money given to Greece, the country has unemployment at 27.2%. How can they possibly crawl out of this well? The EU needs to break-up. Everyone needs to say…(“We tried it, it didn’t work…let’s go back to the old system”)

Apr 12, 2013 2:34pm EDT  --  Report as abuse
bertanderson wrote:
Seriously, how can these countries continue to ask for more bailout money. It’s just going to be wasted away. With all the money given to Greece, the country has unemployment at 27.2%. How can they possibly crawl out of this well? The EU needs to break-up. Everyone needs to say…(“We tried it, it didn’t work…let’s go back to the old system”)

Apr 12, 2013 2:34pm EDT  --  Report as abuse
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