Cyprus threat contained, no plan to leave euro

By Michele Kambas

NICOSIA (Reuters) - The president of Cyprus said on Friday the risk of bankruptcy had been contained and the country had no intention of leaving the euro, in a speech laden with criticism of Europe's currency union for "experimenting" with the island's fate.

Conservative leader Nicos Anastasiades spoke a day after banks reopened following an almost two-week shutdown to avert a run on deposits by worried Cypriots and wealthy foreign depositors as the country raced to clinch a rescue package from the European Union.

Anastasiades said restrictions imposed on bank transactions in Cyprus - unprecedented in the currency bloc since euro coins and banknotes entered circulation in 2002 - would be gradually lifted. But he gave no time frame.

Cyprus's difficulties have sent jitters around the fragile single European currency zone, and the imposition of capital controls has led economists to warn that a second-class "Cyprus euro" could emerge, with funds trapped on the island worth less than euros that can be freely spent abroad.

In a speech to civil servants in the capital, Nicosia, Anastasiades hit out at banking authorities in Cyprus and Europe for pouring money into a crippled Cypriot bank that now faces closure under the terms of the 10 billion euro bailout plan that averted the immediate risk of financial meltdown.

"How serious were those authorities that permitted the financing of a bankrupt bank to the highest possible amount?" Anastasiades said.

"I don't want to say more," he added. "Now is not the time to say who bears more or less of the blame."

Anastasiades clinched the last-ditch bailout in Brussels five days ago, but has faced a backlash from Cypriots angry at the price that came with it - the winding down of the island's second-largest bank, Cyprus Popular Bank or Laiki, and an unprecedented raid on deposits over 100,000 euros that could spell the end of Cyprus as a hub for offshore finance.

The country faces steep job losses and a prolonged and deep recession.

"EXPERIMENT"

The president, barely a month in the job and wrestling with Cyprus's worst crisis since a 1974 war split the island in two, accused the 17-nation euro currency bloc of making "unprecedented demands that forced Cyprus to become an experiment".

But he added: "We have no intention of leaving the euro. In no way will we experiment with the future of our country."

European leaders have insisted the raid on big bank deposits in Cyprus is a one-off in their handling of a debt crisis that refuses to be contained.

But policymakers are divided, and the waters were muddied a day after the deal was inked when the Dutch chair of the euro zone's finance ministers, Jeroen Dijsselbloem, said it would serve as a model for the handling of future crises.

Faced with a market backlash, Dijsselbloem rowed back. But on Friday, European Central Bank Governing Council member Klaas Knot, a fellow Dutchman, said there was "little wrong" with his assessment.

"The content of his remarks comes down to an approach which has been on the table for a longer time in Europe," Knot was quoted as saying by Dutch daily Het Financieele Dagblad. "This approach will be part of the European liquidation policy," he said, in comments a spokesman said were accurately reported.

The Cyprus rescue differs from those in other euro zone countries because, for the first time, bank depositors have had to take a hit.

Warnings of a stampede at Cypriot banks when they reopened on Thursday proved unfounded.

For almost two weeks, Cypriots were on a ration of limited withdrawals from bank cash machines. Even with banks now open, they face a regime of strict restrictions designed to halt a flight of capital from the island.

Anastasiades said the capital controls would be "gradually eased until we can return to normal."

The immediate threat of national bankruptcy had been averted, he said. "The situation, despite the tragedy of it all, is contained."

The government initially said the controls would stay in place for seven days, but Foreign Minister Ioannis Kasoulides said on Thursday they could last "about a month".

Economists warn it could be much longer before confidence in the Cypriot economy bounces back enough to lift the restrictions.

Cypriot authorities said on Friday that cheques could be used to make payments to government agencies up to a limit of 5,000 euros, easing an original blanket ban on cheque payments. Anything more than 5,000 euros would require Central Bank approval. (Additional reporting by Ivana Sekularac and Gilbert Kreijger in Amsterdam; Writing by Matt Robinson; Editing by Giles Elgood)