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Experts: Cyprus must focus on easing money control

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October 30, 2013 11:25 AM EST | AP

NICOSIA, Cyprus (AP) — Cypriot authorities need to focus on rebuilding the bailed-out country's gutted banking sector and eliminate controls on money flows, a commission of experts has advised.

The four-member Independent Commission on the Future of the Cyprus Banking Sector says the government must leave no doubt that it can live up to the terms of its rescue so as not to fan concerns that the capital controls will stay in place over the long term.

"A clear schedule of steps needs to be laid out to reconstitute (Bank of Cyprus) and the cooperative sector, so that capital controls are lifted and uncertainty removed," said a summary of the Commission's recommendations that the Associated Press obtained Wednesday, a day before their official release.

The controls were imposed in March after Cyprus agreed with other eurozone countries and the International Monetary Fund on a rescue plan that forced uninsured depositors to take massive losses on their savings in Bank of Cyprus, the country's largest, and the now-defunct Laiki. Bank of Cyprus absorbed parts of the smaller lender.

Cypriot authorities have already put together a 'roadmap' of banking sector milestones that must be achieved before the controls — which include a daily withdrawal limit of 300 euros — are fully phased out. The government hopes to remove almost all controls by early next year.

The four-person Commission says there are "sound reasons" for Cyprus to keep a large banking sector over the longer term, primarily because there are no other sources of finance in the country.

But it recommends that bank boards be strengthened to counterbalance the influence of executives, with the addition of at least two non-Cypriots as members.

It also criticized an ongoing dispute between the government and the Central Bank governor, Panicos Demetriades. Cyprus President Nicos Anastiades has said he would ask the Supreme Court to remove Demetriades for what he said was the governor's poor performance during bailout negotiations.

The Commission says the country's "fragmented" bank supervisory system should come under one roof and increase oversight. It said "too much power" is concentrated in the hands of the central bank governor which should be diluted through a stronger board.

It says the ineffective Financial Stability Committee — composed of the central bank, the finance ministry and other regulators — should be bolstered to foster a more coherent supervisory policy.