Cyprus debacle could cost double annual GDP by 2020 -report
* Cyprus bank commission sees capital controls harmful
* EU could backstop Cyprus, says commission head
* Cyprus first euro zone nation to impose controls
NICOSIA, Oct 31 (Reuters) - An economic crisis which forced the brutal downsizing of Cyprus's inflated banking sector could cost the island more than double its GDP by 2020, banking experts said on Thursday.
Excessive risk-taking by banks and an inability of authorities to deal with the crisis brought Cyprus to the brink of financial ruin in March, and it became the first euro zone country to impose capital controls to prevent a deposit flight.
Now those same restrictions on accessing cash are stifling domestic growth, adding to the hardship of an economy expected to contract more than 6.0 percent this year.
Cyprus should consider lifting capital controls, issue a state guarantee of all deposits and then get a commitment from the EU that it would provide the necessary capital support, if needed, the international panel of experts said.
"By far the most urgent issue for banks today is the lack of confidence in the system," said David Lascelles, a Briton who chairs a four-member international commission on the future of the Cypriot banking sector.
Cyprus closed its second-largest lender, Laiki, and forced major depositors in Bank of Cyprus to recapitalise the bank with their own money for the state to receive 10 billion euros in aid from the EU and IMF.
The experts, commissioned by the Cypriot central bank, said they believed Cyprus would feel the impact for years to come.
A loss of output based on actual and potential GDP over the 2012-2014 period ranged between 8.4 and 5.3 billion euros, researchers said.
Over the longer term to 2020, losses to Cyprus's 17 billion euro economy lay between 35.3 and 16.7 billion, or 233 to 110 percent of GDP.
With investors so alarmed by the deposit-grab, Lascelles said battered confidence was still evident in deposit outflows, which have continued despite controls put in place by Cypriot authorities at the end of March.
But the commission believed a target-based approach to easing these controls, linked to meeting bailout conditions, was problematic, he said.
"So long as the process lasts, there are going to be problems with lending, with saving. Foreign confidence in the Cyprus economy and economic recovery itself will take a long time," Lascelles said.
Lascelles said the commission acknowledged its suggestion the EU backstop Cyprus to lift capital controls was unconventional, but that it was their job, as an independent commission, to express ideas others could not do for political reasons.
"I have to tell you we have found very wide support for this," he said. (Reporting By Michele Kambas; editing by Stephen Nisbet)
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