Cyprus bailout: Banks to stay closed until Thursday

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Media captionPresident Anastasiades: "We leave behind uncertainty and look with optimism into the future"

All Cypriot banks will remain closed until Thursday, the central bank now says, and temporary measures will be placed on transactions when they reopen despite an EU/IMF bailout deal.

Earlier, the authorities said all but the biggest two would open on Tuesday.

The central bank now says all will remain closed to ensure the whole banking system functions "smoothly".

The bailout deal will see larger depositors in the two biggest banks, Bank of Cyprus and Laiki, lose money.

President Nicos Anastasiades said "very temporary restrictions" would be put on capital flows, but gave no details.

Controls to prevent money leaving the country are already in place.

Certain limits on the size of cash withdrawals are expected to continue.

'30% losses'

Banks have not been open since 15 March. Their reopening had been expected after Cyprus agreed a deal with the International Monetary Fund (IMF) and the European Union (EU) that releases 10bn euros in support.

It was conditional on Cyprus itself raising 5.8bn euros, most of which looks likely to come from depositors with more than 100,000 euros (£85,000) in Bank of Cyprus and Laiki or Popular Bank.

The banks remained closed after the country's first money-raising solution, which would have hit smaller deposit holders as well as larger holdings, was rejected by parliament.

The new deal for Cyprus, unlike previous agreements, does not require parliamentary approval. It will also include austerity measures and tax increases.

Laiki will be shut down, and deposits under 100,000 euros, which are guaranteed by the state under EU law, will move into the Bank of Cyprus to create a "good bank".

Deposits above that insured amount will be frozen and used to pay Laiki's debts and recapitalise the Bank of Cyprus, with depositor losses eventually converted into shares.

Major depositors, many of whom are wealthy Russians, will not be able to access accounts exceeding the 100,000-euro limit until the restructuring of the banks is complete.

A government spokesman said the losses on uninsured depositors would be "under or around 30%".

'Specific case'

On Monday morning, hopes that the deal would solve the crisis lifted shares.

But later, stock markets were rocked after the head of the Eurogroup of eurozone finance ministers suggested that the deal for Cyprus could form a template for resolving future eurozone banking problems.

Jeroen Dijsselbloem, the Dutch finance minister who as head of the Eurogroup played a key role in the Cyprus negotiations, told Reuters and the Financial Times: "If there is a risk in a bank our first question should be 'OK, what are you in the bank going to do about that?'"

He later added a clarification, saying that Cyprus was "a specific case with exceptional challenges".

Mr Dijsselbloem said the pattern for bank rescues should see shareholders take the first hit, then bondholders, who lend money through financial markets, and only then should depositors with large bank balances be tapped.

The Cyprus deal puts the burden for dealing with problem banks on their shareholders and creditors - in this particular case, customers with large bank balances - rather than the government and taxpayers, or bondholders.

The BBC's Andrew Walker points out that the more common approach to failing banks in the current crisis has been for the state to inject new capital.

He says Cyprus' banks are unusual in that they have relatively few financial market investors who could be tapped.

In the past, nations such as Ireland have pumped billions of taxpayers' money into propping up their banks, rather than risk upsetting large investors and spooking the financial system.

Despite the Cypriot economy's relatively small size, many analysts had been concerned that the crisis would spread to the wider eurozone, had Cyprus been forced to give up the single currency.

There were fears that the country's possible exit from the euro would trigger a loss of confidence across the single currency bloc, and prompt investors to withdraw from other troubled economies, such as Greece.

However, while Cyprus is now likely to remain in the eurozone, the country still faces significant obstacles as it attempts to recover from the crisis.

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