Cypriot banks to remain closed until Thursday

The announcement last night by the Central Bank of Cyprus came hours after it said all banks except the country’s two largest lenders, Laiki and Bank of Cyprus, would open this morning.

Banks have been closed since March 16 to avert a run on deposits as the country’s politicians struggled to come up with a plan that would raise enough funds to qualify for an international bailout.

An initial plan that would seize up to 10% of people’s bank accounts had spooked depositors and was soundly rejected by MPs.

All except the country’s two largest lenders had been due to open today after the country clinched an 11th-hour deal with the 17-nation eurozone and the International Monetary Fund to provide Cyprus with a bailout.

Without that deal, the country’s banks would have collapsed, dragging down the economy and potentially pushing it out of the eurozone.

But last night the Central Bank said that “for the smooth functioning of the entire banking system, the finance minister has decided, after a recommendation by the governor of the Central Bank, that all banks remain shut up to and including Wednesday”.

ATMs have been functioning, but many run quickly out of cash, and a daily withdrawal limit of 100 euros (£85) was imposed on the two largest lenders, Bank of Cyprus and Laiki.

Under the deal reached in the early hours of yesterday morning in Brussels, Cyprus agreed to slash its oversized banking sector and inflict hefty losses on large depositors in troubled banks to secure the 10 billion euro (£8.5bn) bailout.

The new plan allows for the bulk of the funds to be raised by forcing losses on accounts of more than 100,000 euros (£85,000) in Laiki and Bank of Cyprus, with the remainder coming from tax increases and privatisations.

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 bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation’s biggest lender, 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 is not yet clear how severe the losses would be to Laiki’s large bank deposit holders, but the euro finance ministers noted the restructure expected to yield 4.2 billion euros (£3.5bn) overall. Analysts have estimated investors might lose up to 40% of their money.

Speaking about the marathon 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”.