Cyprus controls expected to hit foreign transactions

By Michele Kambas and Costas Pitas

NICOSIA (Reuters) - Cyprus is expected to stop people taking their money out of the country but will not restrict dealings at home as it tries to avert a run on its banks after agreeing a tough rescue package with international lenders.

Cypriots have taken to the streets of Nicosia in their thousands to protest against a bailout deal that will push their country into an economic slump and cost many their jobs.

European leaders said the deal averted a chaotic national bankruptcy that might have forced Cyprus out of the euro.

With banks due to reopen on Thursday after nearly two weeks, Finance Minister Michael Sarris said capital controls will be "within the realms of reason" and a business leader said he had been told they would affect only international transactions.

"We will look at the best way to limit the possibility of large sums of money leaving, and not imposing punitive conditions on the economy, businesses and individuals," Sarris told local television.

Speaking after meeting government officials, the head of the Cyprus chamber of commerce said: "We have been assured that limitations will not affect transactions within Cyprus at all."

"Where there will be limitations is on what we spend abroad and also on capital outflows," Phidias Pelides told reporters.

The central bank governor said earlier that "loose" controls would apply temporarily to all banks. Earlier, the finance minister said they could be in place for weeks. Banks have been shut since final bailout talks got under way in mid-March.

Russia, whose citizens have billions of euros in Cyprus and use Cypriot banks to move money around even among Russian firms, cautioned Nicosia against imposing onerous controls on healthy banks and noted that Moscow was reviewing loan terms to Cyprus.

"If there are such measures, this will not foster trust but only provoke additional problems for participants, depositors," Russian Finance Minister Anton Siluanov said on Tuesday.

He cautioned that Russian willingness to restructure and extend a 2.5-billion euro loan made to Cyprus in 2011 would depend on the island's decision on capital controls.

"We will discuss (restructuring of the loan) in the context of the decisions the parliament adopts," he said. "We are prepared to discuss within these parameters."

State-controlled Russian bank VTB has a subsidiary in Cyprus, Russian Commercial Bank, which has not been directly affected by a bailout deal which focuses on big local banks that lost badly in the restructuring of debts in neighboring Greece.

POPULAR ANGER

The terms of the 10-billion euro ($13-billion) rescue from the European Union, International Monetary Fund and European Central Bank have stirred popular anger within Cyprus at the country's partners in the EU, notably Germany, the bloc's main paymaster and fiercest advocate of austerity.

On Tuesday, many hundreds of high school students protested at parliament, in the first major expression of popular anger since the bailout was agreed in the early hours of Monday in Brussels. The deal largely side-stepped the Cypriot parliament, and has triggered opposition calls for a referendum.

"They've just got rid of all our dreams," said one student, named Thomas.

Outside the central bank on Tuesday, about 200 employees of the country's biggest commercial lender, the Bank of Cyprus, demanded the resignation of central bank governor Panicos Demetriades, chanting "Hands off Cyprus" and "Disgrace".

Dimos Dimosthenous, a veteran Bank of Cyprus employee, said: "The bank is being driven to closure. That will be the end."

A Bank of Cyprus official said its chief executive, Yiannis Kypri, had been removed on the orders of the central bank.

It follows the appointment of a special administrator to run the bank, which is being restructured as part of the bailout deal, and an offer to resign by its chairman, Andreas Artemis.

ACCOUNTS FROZEN

The second largest lender, Cyprus Popular Bank, also known as Laiki, is to be shut down, and accounts of under 100,000 euros and some loans will be moved to the Bank of Cyprus. Deposits at both banks over the 100,000-euro mark, which is an EU benchmark for state insurance, will be frozen.

Government officials have estimated that these larger depositors, many of them wealthy foreigners including Russians, could lose around 40 percent of their cash.

On Wednesday, the government was appointing special crisis teams of economic experts to advise ministers.

Many Cypriots say they do not feel reassured by the bailout deal, however, and are expected to besiege banks as soon as they reopen after a shutdown that began over a week ago.

The long closure of the banks has hurt business, according to Andreas Hadjiadamou, president of the Cyprus Supermarkets Association, who said consumer confidence had "hit the floor".

Maria Benaki, who runs a family silverware business on Nicosia's biggest shopping street, said she had not had a customer in days.

"The situation is dire," she said. "What will happen at the end of the month when I need to pay my bills?"

(Additional reporting by Agnieszka Flak in Durban, Douglas Busvine and Steve Gutterman in Moscow and Laura Noonan and Karolina Tagaris in Nicosia; Writing by Giles Elgood and Matt Robinson; Editing by Will Waterman and Alastair Macdonald)

Source: http://news.yahoo.com/cyprus-readies-capital-controls-avert-bank-run-090603283--finance.html

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