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Cypriot President Nicos Anastasiades has sharply criticised the terms imposed for a March debt bailout in a letter to eurozone leaders pleading for help in safeguarding the island's biggest lender.
In the leaked letter he sent last week, Anastasiades charged that eurozone leaders had treated the island unjustly in their concern to avoid further contagion to the much larger Greek economy.
The conservative president said that the haircut -- unprecedented for the eurozone -- imposed on larger deposits in the island's two biggest banks had been "implemented without careful preparation".
"No distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as firms' working capital," he said.
"This amounted to a significant loss of working capital for businesses."
Anastasiades said that capital controls, which have yet to be fully lifted three months after they were imposed to head off a run on accounts, were "seriously hampering the conduct of business".
"Artificial measures such as capital restrictions may seem to prevent a bank run in the short term but will only aggravate the depositors the longer they persist," he said.
"Rather than creating confidence in the banking system they are eroding it by the day."
In return for a 10 billion-euro bailout ($13 billion), international creditors demanded the winding up of the island's second largest banker Laiki and a haircut on deposits over 100,000 euros in its largest lender Bank of Cyprus.
Anastasiades complained that the terms of the deal, which saw BoC taking on what it is left of Laiki after it is wound up, saddled it with liabilities that threaten its role as by far the island's key lender.
He said that those liabilities included nine billion euros in so-called emergency liquidity assistance (ELA) -- support from the European Central Bank -- which had been "accumulated over the course of the last year under very questionable circumstances".
His comment was a clear dig at the decision of European central bankers to continue providing support for Laiki at a time when the lender's problems should already have been clear.
Anastasiades said that BoC's taking on of that liability from Laiki "has substantially increased the vulnerability of its own funding structure, with its cumulative ELA liability reaching a very high 11 billion euros".
Anastasiades said that Finance Minister Haris Georgiades had written to the Troika mission chiefs on May 19 about the problems facing BoC but had yet to receive any reply.
"I stress the systemic importance of BoC, not only in terms of the banking system but also for the entire economy," Anastasiades said.
"The success of the programme approved by the Eurogroup (the eurozone finance ministers) and the Troika (the European Commission, the European Central Bank and the International Monetary Fund) depends upon the emergence of a strong and viable BoC," he said.
"An alternative, longer-term, downsizing of the banking system away from publicity and without bank runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system."
The Financial Times reported on Tuesday that eurozone finance ministers are likely to discuss Anastasiades's letter at their next scheduled meeting on Thursday.
But the paper quoted a senior eurozone official as saying that EU officials were "puzzled" by the letter, and were unlikely to view his request for help for BoC favourably.
Cyprus government spokesman Christos Stylianides put a brave face on the island's economic prospects on Tuesday.
"I believe that this country has a chance not only to survive, but to restart the economy," he said.
"But it will take time. It can't happen from one day to the next."