NICOSIA, April 11 ECB President Mario Draghi has cautioned Cyprus that an investigation against the governor of its central bank, a move that could lead to his dismissal, may violate EU law and could land the island in the European Court of Justice.
Cyprus's parliament said on Wednesday it would launch an inquiry into whether Governor Panicos Demetriades, a member of the Governing Council of the European Central Bank, withheld information from legislators in an investigation into the island's now-collapsed banking system.
In an April 10 letter, seen by Reuters, Draghi said the Cypriot parliament had basically initiated a procedure for the sacking of the governor. The letter was sent to the Cypriot president and the speaker of parliament.
"Initiating a procedure for dismissal is a very serious step, which can only be undertaken if there are serious allegations that one of the grounds for dismissal provided by EU law has materialised," Draghi wrote.
"In the absence of such serious allegations, any attempt to elicit evidence against a Governor as a means of putting pressure on him would jeopardise the Governor's statutorily protected independence," he said.
The ECB declined to comment.
EU law establishes only two clear grounds for dismissal: if a governor no longer fulfilled the conditions required for the performance of his duties, or if he were guilty of serious misconduct, according to Draghi.
"As you are aware, a decision to remove a Governor from office is subject to the judicial control of the Court of Justice of the European Union," he concluded.
One of the guarantees of central bank independence is the requirement that governors cannot be dismissed on grounds other than those permitted by EU law, Draghi said. National law needed to be in conformity with those provisions.
Cypriot lawmakers on Wednesday said parliament's ethics committee would investigate whether Demetriades supplied enough information on the scope of an investigation into Cyprus's two banks, which have imposed massive losses on depositors in order for the island to qualify for a 10 billion euro bailout.
The parliamentary inquiry appears to be an outgrowth of friction between Demetriades, appointed by Cyprus's former communist administration in May 2012, and the present centre-right government in power for little over a month.
Under the bailout, Cyprus Popular Bank will be dismantled with some of its assets transferred to Bank of Cyprus , which has imposed losses on its savers holding more than 100,000 euros.
Both institutions suffered heavy losses to a Greek sovereign debt write-down in late 2011, prompting the then cash-strapped Cypriot state to seek international aid when the two banks turned to the government for financial support.