- The head of Cyprus's central bank has sought to deflect blame for the chaos
- Bank governor has promised a steady lifting of capital controls
- Tells FT: "I can't really tell you if it will be seven or 14 days before capital controls end"
The head of Cyprus's central bank has sought to deflect blame for the chaos that has engulfed the island's financial system but has promised a steady lifting of capital controls and played down the risk of a flight of deposits from the country once controls are suspended.
"I can't really tell you if it will be seven or 14 days before capital controls end," Panicos Demetriades, governor of the Central Bank of Cyprus, said in an interview with the Financial Times. "We have to lift them gradually."
Mr Demetriades was seeking to restore calm after another spike of nervousness over the weekend when it was revealed that depositors in Bank of Cyprus, the country's biggest lender, would be subjected to a further likely "haircut" of the value of their deposits.
In his first interview since the crisis escalated last month, he denied that there would be a run on deposits once capital controls were eventually relaxed. "Once people realise how well capitalised the banks are there is little reason why there will be deposit flight," he insisted.
The rescue plan would turn Bank of Cyprus into "one of the best capitalised in the world", Mr Demetriades said. Analysts believe the lender could have a core tier one capital ratio of close to 20 per cent initially, falling to 9 per cent -- the level required by the troika agreement -- in three years' time once losses have been incurred and recognised.
It was announced on Saturday that depositors with more than €100,000 in Bank of Cyprus will get shares in the bank in exchange for 37.5 per cent of their uninsured deposits, while a further 22.5 per cent of their deposits will be put into a special fund attracting no interest and could see further write-offs.
Amid worries that the losses would jump to 60 per cent -- more than the 40 per cent expected -- Mr Demetriades said the 22.5 per cent frozen deposit allocation would provide a "very substantial buffer".
"I do not expect [the buffer] to be needed," he said. "[The 22.5 per cent] was a number agreed with the troika that reassured all parties concerned that we would not need anything after that. The money will be kept frozen until a valuation is carried out of the assets that are moving from [number two bank] Laiki to the Bank of Cyprus."
The supposedly worst-case losses and resultant capital needs of Cyprus's banks were calculated last summer in an exercise conducted by Pimco, the US bond fund manager. But Mr Demetriades admitted that number could now be higher. Bankers expect fund manager BlackRock or a similar independent third party will be appointed to conduct the follow-up exercise in the next few weeks.
The governor, who has been lambasted in the local press and by local politicians, attempted to distance himself from terms of the agreed €10bn European bailout and deflect blame on to politicians at home and abroad.
"Many people and politicians are confused about who did what," he told the FT. "What we have done is implemented, in a very orderly fashion, what had been agreed with the eurogroup. We did not take part in that decision. It was a political decision. I suspect that, when people realise what actually has happened, they will understand that the central bank played a full role in stabilising the situation."
Mr Demetriades has refused an unofficial request to resign and take the blame for the country's financial ruin. "Almost all the political parties have asked the governor to resign," said Ioannis Kasoulides, the Cypriot minister of foreign affairs, last week at a press conference.
Mr Demetriades claimed to have an "excellent" relationship with the minister of finance and a "good" one with the president, though he stressed throughout the interview how little room for manoeuvre he had had since taking the job last May, and how sidelined he had been by a bailout process that had been dictated by politicians at home and abroad.
The governor said he inherited a banking sector that had been the victim of "unnecessary and in some cases reckless" expansion. At that time he "strongly urged the government to apply to the EU support mechanism. From then onwards I warned through various interviews, talks and statements of the urgent need to come to an agreement with the troika."
In an indication of how dysfunctional his relationship with the president had become in the run-up to the crisis, Mr Demetriades only found out about the country's eurozone bailout when he read about it in press reports.
The open conflict between Mr Demetriades, who was appointed last year by the now-ousted Akel communist party, and the new conservative President Nicos Anastasiades, in particular over how the bailout was implemented, has been blamed for exacerbating the uncertainty around the crisis.
"Maybe the country paid a high price for that [the tension between Mr Demetriades and Mr Anastasiades]," Afxentis Afxentiou, governor of Cyprus's central bank from 1982 to 2002, said in an interview with the FT last week. "They should find a way to smooth it out."