NICOSIA, Cyprus (AP) -- Cyprus' president has warned the country's international creditors that its largest bank's cash reserves are running dangerously low, a problem that could undermine the country's 23 billion euro ($30.8 billion) financial rescue package.
In a letter obtained by the Associated Press Wednesday, Nicos Anastasiades told the heads of the European Commission, the European Central bank and the International Monetary Fund -- collectively known as the troika -- that the Bank of Cyprus is facing a cash crunch.
This liquidity shortage arose because, under the terms of the country's bailout, Bank of Cyprus was forced to shoulder billions in debt when it merged with parts of the now defunct Laiki, the country's second largest lender. The debt, amounting to €9 billion ($12 billion) euro, is ECB emergency funding that Laiki had racked up.
To keep its government going and the country's financial sector from imploding, Cyprus in March negotiated a 23 billion euro ($30 billion) financial rescue package with its euro partners and the International Monetary Fund. In order to receive a 10 billion euro ($13 billion) bailout loan, Cyprus had to raise the remaining 13 billion euros ($17 billion). It did so by splitting up Laiki and imposing heavy losses on depositors with over 100,000 euros sitting in Cyprus' two largest banks.
Cyprus also imposed strict controls on money withdrawals and transfers on all banks to prevent a run as trust drained from the banking system.
In the letter to the troika, Anastasiades said Bank of Cyprus' debt burden is hampering the bank from bolstering its coffers, which in turn is stopping it from obtaining its own emergency cash from the ECB.
Anastasiades added that one option to help out the Bank of Cyprus, would be to reverse the decision making the lender the "megasystemic" bank. Another is to convert part of the Laiki debt into long-term bonds which would be transferred "into a separate vehicle."
"The success of the (bailout) program approved by the Eurogroup and the troika depends upon the emergence of a strong and viable BOC (Bank of Cyprus)," Anastasiades said. "It is for this reason that I urge you to support a long-term solution to Bank of Cyprus' thin liquidity position."
Anastasiades stressed in the letter that he's determined to implement the bailout terms "fully and effectively." But he was highly critical at the way the bailout was hammered out, saying that the so called bail-in was "implemented without careful preparation" which hurt businesses and crushed confidence in the banks.
Cyprus' economy is forecast to shrink by more than 9 percent this year, while unemployment will rise above 15 percent.
Anastasiades faulted the troika for opting to keep in place strict capital restrictions instead of resolving Bank of Cyprus' liquidity crunch. He warned that the restrictions are eroding rather than shoring up confidence in the banking system and keeping them in place over a long period will "inevitably have devastating effects" on the economy.
Meanwhile, Cypriot officials scrambled on Wedesday to dismiss reports suggesting that Cyprus aimed to renegotiate the bailout deal.
Anastasiades said the reports "don't correspond with reality" and that euro area finance ministers would discuss in their meeting Thursday ways of bolstering ways attempts to get the Cypriot economy to recover under the terms prescribed by the bailout.
Government spokesman Christos Stylianides said earlier Wednesday that there is no attempt to renegotiate the bailout.
"I reiterate once again that the Cyprus government is fully committed to applying the terms of the memorandum and has already embarked on that road because it is convinced that the full and transparent implementation of the agreement is the only way the economic challenges can be addressed," Stylianides said in a written statement.
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