NICOSIA (Reuters) - Cyprus's central bank defended its governor from "simplistic" government allegations on Monday, saying he had prevented the disorderly bankruptcy of the island's second-largest bank and thereby of the state itself, now in line for a bailout.
The government has taken Central Bank of Cyprus Governor Panicos Demetriades to task for allowing Popular Bank, also known as Laiki Bank, to receive emergency liquidity assistance (ELA), only to be wound down in a chaotic bailout last month.
The central bank rejected the allegations, however.
"The simplistic and unsubstantiated allegation that the Central Bank of Cyprus governor 'allowed' the continuation of the provision of liquidity to Laiki bank through ELA is incorrect and is refuted," a central bank document circulated in London said.
"On the contrary it is clearly evident that the governor, with his timely statements and actions, prevented a disorderly bankruptcy of Laiki bank and consequently the country itself."
Cypriot President Nicos Anastasiades took the issue up this month in a six-page letter to European Central Bank President Mario Draghi.
He accused Demetriades, an ECB governing council member, of failing to regulate and protect the banking system because he did not stop the flow of emergency funds to Laiki Bank.
Cyprus eventually had to accept the onerous terms of a European Union and International Monetary Fund bailout when the ECB threatened to cut off liquidity to the bank.
The Cypriot central bank says Laiki was kept on a lifeline because the lack of a bank resolution mechanism at the time could have saddled the state with massive losses in the event of the bank collapsing as the state would have had to compensate depositors.
Under the terms of the island's 10 billion euro bailout, Laiki is being wound down while depositors in the country's largest lender, Bank of Cyprus, could see up to 60 percent of their savings over 100,000 euros converted into equity to recapitalise the bank.