Cyprus central bank sees 'substantial' risks to economy

NICOSIA Wed May 22, 2013 5:53am EDT

Cyprus Central Bank Governor Panicos Demetriades (L) and Cypriot Finance Minister Michael Sarris listen to reporters' questions during a news conference in the building of the Central Bank of Cyprus in Nicosia March 26, 2013. REUTERS/Yannis Behrakis

Cyprus Central Bank Governor Panicos Demetriades (L) and Cypriot Finance Minister Michael Sarris listen to reporters' questions during a news conference in the building of the Central Bank of Cyprus in Nicosia March 26, 2013.

Credit: Reuters/Yannis Behrakis

NICOSIA (Reuters) - Cyprus faces substantial risks to its economic outlook and a forecast recession could be deeper than forecast, its central bank governor said in a prepared speech on Wednesday.

The island state, which narrowly averted financial meltdown in March, faces "unusually high" macroeconomic and banking sector risks, according to the speech, which was delivered to a Nicosia conference by a senior manager of the central bank.

Central bank chief Panicos Demetriades warned about the potential impact of a resolution process for two large banks and losses forced on big depositors under the island's bailout deal, which has also entailed the imposition of capital controls.

The "recession could be deeper than anticipated with negative feedback loops on public finances, including government debt," he said in the text of the speech.

Cyprus secured a 10 billion euro EU/IMF bailout in March, the fifth euro zone country to require aid. Its 17.5 billion euro economy is expected to shrink by 8.7 percent his year.

Conditions of the rescue package include the closure of Cyprus's second-largest bank, Popular, and imposing losses on uninsured savings in its No. 1 lender, Bank of Cyprus, to recapitalize both after huge losses on lending to Greece.

Capital controls will have to be eased gradually, Demetriades warned, as eliminating them abruptly could trigger rapid outflows from the banking sector and liquidity problems.

(Reporting By Michele Kambas; Editing by Catherine Evans)

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