NICOSIA, Cyprus--Cyprus's president has accused the island's
central bank chief of bowing to political pressure when he failed
to prevent a looming banking crisis that led to the collapse of the
country's second-biggest bank last month.
The charges, made in a letter sent to European Central Bank head
Mario Draghi, represent the latest salvo in the deepening rift
between President Nicos Anastasiades and Central Bank of Cyprus
Governor Panicos Demetriades over who is to blame for the country's
financial crisis.
The letter comes after three members of the central bank's board
resigned last week to protest the bank chief's handling of the
country's financial crisis and a week after Cyprus's president
fired Mr. Demetriades's deputy. As the same time, lawmakers in
Cyprus are considering an investigation into whether the central
bank chief misled the parliament over events relating to the
crisis.
Amid the fray, Mr. Draghi last week warned Cyprus's government
that any move to undercut the autonomy of its central bank -- which
enjoys political independence --could lead to a legal challenge at
the European Court of Justice.
In the letter to Mr. Draghi dated April 15, Mr. Anastasiades
said that the embattled central banker's decision to continue
extending emergency credit to Cyprus Popular Bank PCL
(CPB.CP)--after the bank known as Laiki was clearly insolvent from
June of last year according to Mr. Anastasiades--violated Mr.
Demetriades' duties as governor and demonstrated shortcomings in
regulating and supervising the island's banks.
Mr. Anastasiades also cited in the six-page letter, seen by The
Wall Street Journal, public comments by Mr. Demetriades that the
central bank's aim was to prevent Laiki's collapse before this
year's presidential elections, when Mr. Anastasiades's
predecessor's term ended. The current Cypriot president said the
comment "raises questions" about the central bank governor's
independence from the former government.
Mr. Demetriades, who was appointed last year by outgoing
President Demetris Christofias, was not immediately available for
comment.
The central banker has previously said he would not step down
and, in a recent media interview, said that the central bank's
independence was under attack. As part of the ECB's network or
euro-zone central banks, Mr. Demetriades cannot be removed from
office except in the case of serious crimes or an inability to
perform his functions as governor.
An ECB representative confirmed that the ECB has received the
letter from the Cypriot president, but declined to comment on the
content.
The letter also appears support one of the allegations made by
lawmakers seeking a probe into Mr. Demetriades. They have accused
him of trying to sidestep an independent audit of what went wrong
at Laiki. "In my opinion, Governor Demetriades, for his own
reasons, clearly failed or omitted to properly instruct [audit firm
Alvarez & Marsal] to carry out a full inquiry, especially for
Laiki Bank, which, as he had stated was insolvent," the letter
added.
Faced with the imminent collapse of its financial sector, Cyprus
this month agreed to some 13 billion euros ($17 billion) worth of
measures -- more than initially expected -- to fix its public
finances and restructure its two biggest banks in exchange for a
EUR10 billion loan from its euro-zone peers and the International
Monetary Fund. The bailout has resulted in uninsured deposits over
100,000 euros being largely wiped out at the two biggest
banks--Laiki and Bank of Cyprus (BOCY.CP).
The austerity measures, combined with the effects of the banking
crisis and capital controls put in place to stem a feared bank run,
are expected to push Cyprus deep into recession this year.
Christopher Lawton in Frankfurt contributed to this story
-Write to Philip Pangalos at philip.pangalos@dowjones.com
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