By MICHALIS PERSIANIS And STELIOS BOURAS
NICOSIA, Cyprus—A dispute between the government in Cyprus and the central bank governor deepened Friday as two members of the central bank board resigned to protest the bank chief's handling of the country's financial crisis.
Andreas Matsis and Haralambos Akhniotis, both seen as close to the governing Democratic Rally party, cited "long-term problems in the functioning of the board" in their decision to resign, according to a central bank official.
They also accused the bank's chief, Panicos Demetriades, of circumventing the board in recent decisions.
The resignations are part of a widening blame game on the island over responsibility for the country's financial meltdown.
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European Pressphoto Agency
Cypriot Finance Minister Harris Georgiades, left, speaks to European Central Bank President Mario Draghi at an informal meeting of Ecofin ministers in Dublin on Friday.
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They came just days after President Nicos Anastasiades fired Mr. Demetriades's deputy, and as lawmakers consider opening an investigation into whether the central bank chief misled Parliament over events relating to the crisis.
On Friday, the president of the European Central Bank, Mario Draghi, warned that any move by Cyprus to undercut the autonomy of its central bank—which, as part of the euro-zone's central bank network, enjoys political independence—could lead to a legal challenge at the European Court of Justice, the European Union's highest court.
It was Mr. Draghi's second warning to Cyprus in days.
Earlier this week, the ECB chief told Mr. Anastasiades in a letter reviewed by The Wall Street Journal that moves against the Mr. Demetriades "would jeopardize the governor's statutorily protected independence."
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Faced with the imminent collapse of its financial sector, Cyprus this month agreed to some €13 billion ($17 billion) worth of measures—more than initially expected—to fix its public finances and restructure its two biggest banks in exchange for a €10 billion loan from its euro-zone peers and the International Monetary Fund.
Depositors at the two banks—Cyprus Popular Bank PCL and Bank of Cyprus PCL—stand to lose billions of euros from their savings.
The austerity measures, combined with the effects of the banking crisis and capital controls put in place to stem a feared bank run, are expected to push Cyprus deep into recession this year.
In Dublin, euro zone finance ministers gathered Friday to approve the terms of the bailout, which then goes to national parliaments for ratification. "All elements are in place for national parliaments to ratify," Jeroen Dijsselbloem, president of the group, told a news conference.
But as the costs of the bailout have increased, so too has the finger pointing. And Mr. Demetriades, who was appointed to his post last May by Cyprus's former president, is being blamed for not having done more to prevent the banking crisis.
Few analysts expect Mr. Demetriades to be relieved of his duties.
"For domestic reasons there is a political power game going on," said Hubert Faustmann, associate professor of history and political science at the University of Nicosia. "Mr. Demetriades may have done a bad job but nothing criminal. He can't be forced into resigning."
Still, by putting pressure on him, the government is limiting his room for maneuver. The resignation of the two board members—following several other recent departures—now means that the six-member board has been depleted. New members are appointed by Cyprus's president.
The country is still striving to restore normality in its banking sector after three weeks of capital controls, the country's finance minister said in an interview late Thursday.
Harris Georgiades said a move to increase the limit on domestic financial transactions to €300,000 would "effectively" free up movement of capital in Cyprus. In the next few days, restrictions on international banks will also be lifted, he added.
"The next step will be a loosening for the international banking sector to make it easier for them too. That is the next thing that we'll do in the coming days," he said.
—Laurence Norman and Maarten van Tartwijk in Dublin, Nina Koeppen in Frankfurt and Matina Stevis in Brussels contributed to this article.
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