March 27 (Bloomberg) -- Cypriot capital controls may not prevent the country’s lenders from becoming more reliant on funding from the European Central Bank, UBS AG Chairman Axel Weber said.
Capital controls are “maybe a step to avoid a catastrophic exit from the euro which would have had much larger repercussions,” Weber said on Bloomberg Television’s “On the Move” with Francine Lacqua today in London. “A catastrophe has been averted, but the impact on the Cypriot economy is going to be huge” and “banks will become even more dependent on ECB liquidity because deposits will be largely drained.”
Cypriot banks have been closed since European finance ministers proposed a levy on deposits as a condition for a European Union-led bailout on March 16. Central Bank Governor Panicos Demetriades said yesterday it will be necessary to impose some restrictions on the movement of capital when financial institutions reopen tomorrow.
Without capital controls, “you’d see a clear bank run and banks would collapse almost immediately,” said Weber, 56, who is a former president of Germany’s Bundesbank. “It’s unheard of in a monetary union” and “basically seals the country off to a larger extent from the rest of the union. And that again is not a nice thing to do.”
The ECB said on March 25 it won’t stop the Cypriot central bank from providing the island’s banking sector with emergency funding. It had previously threatened to veto lending if a deal that promised fresh capital and ensured the solvency of the Mediterranean island’s banks wasn’t reached.
Cypriot President Nicos Anastasiades agreed to tax deposits of more than 100,000 euros ($128,000) and wind down Cyprus Popular Bank Pcl, the country’s second biggest, with viable assets being taken over by Bank of Cyprus Plc, the largest lender.
“Where I still see a problem is the unequal treatment of the different banks,” Weber said. “For some banks, the two largest banks in Cyprus, you will see a major impact on deposits above 100,000 euros. That raises a whole lot of legal issues because equal treatment in the European Union is one thing that is very frequently gone to as a legal norm.”
Axel Weber left the Bundesbank in April 2011 after resigning on concern about the ECB’s decision to buy bonds of Europe’s most indebted countries. He became UBS chairman one year later.
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