Cyprus ordered banks to remain closed for two more days over fears of a run by customers trying to get their money out, after striking a pre-dawn bailout deal on Monday that averted the country’s imminent bankruptcy.
The sudden midnight postponement of the much anticipated on Tuesday bank opening by all but the country’s two largest lenders was sure to hammer businesses already reeling from more than a week of no access to their deposits.
ATMs have been dispensing cash but often run out, and an increasing number of stores and other businesses have stopped accepting credit or debit cards. The two largest lenders, the struggling Laiki and Bank of Cyprus, have imposed a daily withdrawal limit of 100 euros ($130).
Cyprus clinched an eleventh-hour deal with the 17-nation eurozone and the International Monetary Fund early Monday for a 10 billion euro bailout. Without it, the country’s banks would have collapsed, dragging down the economy and potentially pushing it out of the euro.
Under the deal, the country agreed to slash its oversized banking sector and inflict hefty losses on large depositors in troubled banks.
The country’s banks have been closed since March 16 to avert a run on deposits as the country’s politicians struggled to come up with a way to raise enough money to qualify for the bailout. An initial plan that would have raised 5.8 billion euros by seizing up to 10 percent of people’s bank accounts enraged depositors and was soundly rejected by lawmakers early last week.
But with the immediate crisis averted, worry spread across Europe that the deal could boomerang, spooking investors and hurting the eurozone’s efforts to keep its debt crisis from spreading.
“The Cypriot bailout has a powerful legacy which may alter the security with which depositors elsewhere in the eurozone view the safety of banks,” said Jane Foley, an analyst at Rabobank International.
The initial plan to seize a percentage of all deposits sent jitters across the eurozone. European officials, anxious to prevent any further spread of the financial crisis that has already left Greece, Ireland and Portugal dependent on bailout funds, had been at pains to point out that Cyprus was a unique case.
The country of about 800,000 people has a banking sector eight times larger than its gross domestic product, with nearly a third of the roughly 68 billion euros in the country’s banks believed to be held by Russians.
Under the new Cyprus bailout plan, the bulk of the funds will be raised by forcing losses on accounts of more than 100,000 euros in the country’s second— largest lender, Laiki, and its top lender, Bank of Cyprus, with the remainder coming from tax increases and privatizations.
People and businesses with more than 100,000 euros in their accounts at Laiki face significant losses. The bank will be dissolved immediately into a so—called bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the Bank of Cyprus.
Deposits at Bank of Cyprus above 100,000 euros will be frozen until it becomes clear whether or to what extent they will also be forced to take losses. Those funds will eventually be converted into bank shares.
It’s not yet clear how severe the losses will be to Laiki’s large bank deposit holders, but the euro finance ministers noted that the restructuring is expected to yield 4.2 billion euros overall. Analysts have estimated investors might lose up to 40 percent of their money.
Speaking about the marathon 10-hour negotiations in Brussels that resulted in the deal, Cyprus President Nicos Anastasiades said “the hours were difficult, at some moments dramatic. Cyprus found itself a breath away from economic collapse.”
The agreement, he said, “is painful, but under the circumstances the best we could have ensured. The danger of Cyprus’ bankruptcy is definitively overcome and the tragic consequences for the economy and society are averted.”
