Expert review: Cyprus needs deposit guarantees

Associated Press
A woman crosses a busy shopping street in front of a Eurobank branch currently under construction in the heart of Cyprus’ capital Nicosia on Thursday, Oct. 31, 2013. A commission of experts says bailed-out Cyprus should offer a European Union-backed state guarantee on all deposits once it removes limits on money flows. (AP Photo/Petros Karadjias)
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NICOSIA, Cyprus (AP) — A commission of experts said Thursday that the Cypriot government should offer a guarantee on all bank deposits when it removes limits on money flows in order to maintain confidence in the financial system.

The restrictions — including a ban on cashing checks and a daily withdrawal limits of 300 euros — were imposed in March after Cyprus agreed on a bailout plan with other eurozone countries and the International Monetary fund.

They were needed to avoid a run because, as part of the 10 billion-euro ($13.6 billion) bailout, uninsured depositors were forced to take massive losses on their savings in the two largest banks.

The Independent Commission on the Future of the Cyprus Banking Sector said the state guarantee is "the best way forward" to help restore trust in the crushed banking sector and to attract foreign investment needed to get the economy out of recession.

The Commission, which was composed of four banking veterans, said the state guarantee should be backed up by the European Union, although it's uncertain whether the bloc would agree to such a move.

Their report, which was commissioned by the central bank, said it is unlikely capital controls will be lifted in the very near future because work to put banks back on a sure footing still has "a way to go." It said efforts to lift the controls, which have been only partially relaxed, should be speeded up. The government aims to eliminate almost all restrictions by early next year.

Although a Cyprus-EU deposit guarantee would accelerate economic recovery, EU authorities would not consider such a move "unless Cyprus can demonstrate that it is doing everything that it can do to help itself," said one of the commissioners, former Bank of England official David Green.

Cyprus needs to remain steadfast to the bailout's reform and spending targets, said Green.

The Commission's other recommendations included the establishment of a national body to forge a coherent financial policy and to promptly identify risks, a tougher, more centralized banking supervisory system and more stringent vetting of bank board members.

The Commission also recommended protecting commercial banks from a large number of bad loans by putting them into a separate entity where they can be dealt with.

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