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Cyprus bailout: Banks face temporary controls Cyprus bailout: Banks to stay closed until Thursday
(35 minutes later)
The president of Cyprus said temporary limits will be placed on bank transactions after a bailout deal that will see larger depositors in the two biggest banks lose money. 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.
Cypriot banks will not reopen until Thursday. Earlier the authorities had said most would be open on Tuesday. 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.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.Controls to prevent money leaving the country are already in place.
Certain limits on the size of cash withdrawals are expected to continue.Certain limits on the size of cash withdrawals are expected to continue.
'30% losses'
The banks' reopening came after Cyprus agreed a deal with the International Monetary Fund (IMF) and the European Union (EU) that releases 10bn euros in support.The banks' reopening came 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 billions of euros, which look likely to come from depositors in Bank of Cyprus and Laiki with more than 100,000 euros (£85,000). It was conditional on Cyprus itself raising 5.8bn euros, most of which look likely to come from depositors with more than 100,000 euros (£85,000) in Bank of Cyprus and Laiki, known as Popular Bank.
The banks shut a week ago after the country's first money-raising solution, which would have hit smaller deposit holders as well as larger holdings, was rejected.The banks shut a week ago after the country's first money-raising solution, which would have hit smaller deposit holders as well as larger holdings, was rejected.
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''Specific case'
On Monday morning, hopes that the deal would solve the crisis lifted shares.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 model could form a template in any future bailout.But later, stock markets were rocked after the head of the Eurogroup of eurozone finance ministers suggested that the deal for Cyprus model could form a template in any future bailout.
Jeroen Dijsselbloem, the Dutch finance minister who as head of the Eurogroup played a key role in the Cyprus negotiations, said the deal represented a new 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, said the deal represented a new template for resolving future eurozone banking problems.
"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 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 told Reuters and the Financial Times.
He later added a clarification, saying that Cyprus was "a specific case with exceptional challenges".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.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, who lend through financial markets.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, who lend through financial markets.
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.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's banks are unusual in that they have relatively few financial market investors who could be tapped.He says Cyprus's 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.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.
Small savers protected
The Cypriot government suggested that account holders with deposits of more than 100,000 euros should expect to lose about 30% of their balances.
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.
Small savers will be protected but Cyprus's second largest bank - Laiki Bank - will be wound up and split into "good" and "bad" banks, with its good assets eventually merged into the Bank of Cyprus, the country's biggest bank.
'Deep recession''Deep recession'
The new deal for Cyprus, unlike previous agreements, does not require the approval of the Cypriot parliament.The new deal for Cyprus, unlike previous agreements, does not require the approval of the Cypriot parliament.
The uncertainty over the future of Cyprus in the eurozone was sparked a week ago when its parliament rejected an earlier bailout deal, which also included a controversial bank levy.The uncertainty over the future of Cyprus in the eurozone was sparked a week ago when its parliament rejected an earlier bailout deal, which also included a controversial bank levy.
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.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.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.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.
The EU-IMF deal involves a massive restructuring of the Cypriot banking system, as well as austerity measures and tax increases.The EU-IMF deal involves a massive restructuring of the Cypriot banking system, as well as austerity measures and tax increases.
There has also been significant public anger in Cyprus at the intervention of European authorities, and the credibility of the Cypriot government has been questioned.There has also been significant public anger in Cyprus at the intervention of European authorities, and the credibility of the Cypriot government has been questioned.
"We see a risk that Cyprus' sovereign debt burden post-bailout might not be sustainable, as the country is likely to enter a deep recession caused by the shrinkage of the banking sector and severe deleveraging," warned Reinhard Cluse, an economist at UBS."We see a risk that Cyprus' sovereign debt burden post-bailout might not be sustainable, as the country is likely to enter a deep recession caused by the shrinkage of the banking sector and severe deleveraging," warned Reinhard Cluse, an economist at UBS.