ECB Said to Consider Cypriot Police Demand in Bailout Probe

The European Central Bank is considering whether to let Cypriot police see confidential documents as part of a criminal probe into emergency lending by the Cypriot central bank, two euro-area officials with knowledge of the matter said.

Policy makers discussed this week whether they can comply with a demand to the Cypriot central bank for ECB documents related to Emergency Liquidity Assistance and minutes of Governing Council meetings where the program was discussed, said the people, who asked not to be named as the talks aren’t public. The application was passed to the ECB’s legal committee, they said. The ECB declined to comment. A spokesman for the Cypriot police force also declined to comment or provide details on the investigation.

The affair risks dragging the ECB into a political battle that has haunted Cyprus for months, threatening to undermine the independence of the Cypriot central bank and the Frankfurt-based institution. Tension between the Cypriot central bank and the government over the country’s bailout this year have escalated, and President Nicos Anastasiades said in September he was considering legal action to remove Governor Panicos Demetriades because of his “shortcomings.”

Demetriades has said that he’s been subject to allegations of wrongdoing in a campaign to force his resignation.

ECB President Mario Draghi wrote to European Commission President Jose Manuel Barroso to request assistance on the probe, one of the people said. The Governing Council of the Frankfurt-based ECB is concerned about any threat to its independence from a criminal prosecution involving monetary-policy operations, the person said.

Police Deadline

Cyprus’s Office for the Investigation of Financial Crime has set a deadline of Nov. 29 for delivery of relevant central bank documents, one of the people said.

As well as records of Governing Council meetings, it requested documents such as applications by the Cypriot central bank for ECB permission for loans to banks and details of funds received by the Bank of Cyprus and Cyprus Popular Bank, previously the island’s two biggest lenders, they said.

The dispute between Anastasiades and Demetriades in part stems from a disagreement over capital controls during bailout negotiations and emergency liquidity lending.

Anastasiades’ main complaint was described in a letter to Draghi dated April 15. In it, the central bank chief was accused of keeping the now-defunct Laiki Bank artificially afloat with ELA funds throughout the second half of 2012 to enable the country to reach elections in February 2013 without needing a bailout.

Lending Program

“I have to say that I’m examining and documenting all the things that make up his shortcomings or lack of adequacy in the execution of his responsibilities,” Anastasiades said on Cyprus’s Mega TV on Sept. 18, adding he was looking into referring the matter to the Supreme Court. Demetriades has said he won’t resign under pressure.

The ELA has been used in countries including Ireland and Belgium to provide liquidity to lenders that don’t have acceptable collateral to access funds at normal ECB tenders. While the loans are technically the responsibility of the national central bank, the Governing Council must consent to their use and votes on their continuance every two weeks.

As tensions between the central bank and the president escalated in the run-up the bailout, Demetriades said in a Bloomberg interview in April he’d received death threats and that his ability to run the central bank was being undermined.

Under EU law, a governor of a Eurosystem member can only be removed from office through incapacity or if found guilty of serious misconduct. Draghi said last month he takes a “dim view” of any attempt to undermine central bank independence.

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