NICOSIA, Cyprus — Cypriot businesses were under increasing strain to keep running on Tuesday after financial authorities stretched the country’s bank closure into a second week amid fears that depositors will rush to drain their accounts.
All but two of the country’s largest lenders had been due to reopen Tuesday, after being shut since March 16 while politicians figured out how to raise the funds necessary for Cyprus to qualify for an international bailout.
Under the deal for a 10 billion euro ($12.9 billion) rescue clinched in Brussels early Monday, Cyprus agreed to slash its oversized banking sector and inflict hefty losses on large depositors in troubled banks.
After initially saying most financial institutions would reopen Tuesday, the country’s central bank made a surprise reversal just before midnight, announcing all banks would remain closed until Thursday.
The announcement followed a broadcast by the country’s president, Nicos Anastasiades, who told Cypriots that the central bank would impose some limits on financial transactions, but assured the public that restrictions would not be permanent.
“It is a very temporary measure, which will gradually be relaxed,” Anastasiades said.
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 ($129,000) in the country’s second- largest lender, Laiki, with the remainder coming from tax increases and privatizations.
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 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’s not yet clear how severe the losses will be to Laiki’s large bank deposit holders, but analysts have estimated investors might lose up to 40 percent of their money.
A top European Central Bank official, Benoit Coeure, who sits on the bank’s six-member executive board, told France’s Europe 1 Tuesday that the plan to keep the banks closed was sensible as “there is still a lot of work to do on the ground”.
“One bank must be shut, and the two big banks must be merged and to do that, the Cypriot central bank has considered it better to keep the banks closed.”
Nonetheless businesses have already been feeling the brunt of the cash crunch, unable to pay salaries and suppliers as Cypriots has slashed spending to keep as much money on them in light of all the uncertainty surrounding the banks.