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Cyprus banks to stay shut as world markets take fright

Update: March, 26/2013 - 11:32

NICOSIA – Cyprus reversed course and decided to keep its banks shut as world markets took fright at the implications for the eurozone of the island's 10-billion-euro bailout deal with international creditors.

Defending the deal earlier, President Nicos Anastasiades said that while he shared widespread bitterness on the island at certain aspects of the negotiations, quitting the eurozone was not the answer.

He promised a criminal investigation to identify those responsible for the debacle.

All banks are to remain shut until Thursday, the Central Bank of Cyprus announced in a shock statement late on Monday, cancelling an earlier decision to open most banks on Tuesday.

Finance Minister Michael Sarris had decided to follow central bank governor Panicos Demetriades's recommendation to "ensure the smooth functioning of the entire banking system" the statement said.

Just hours earlier, the central bank had said all Cyprus banks except for its two biggest lenders, those worst-hit by the financial crisis, would reopen on Tuesday after a 10-day lockdown for fear of a run on deposits.

Laiki Bank and the Bank of Cyprus were in any case staying shut until Thursday due to the restructuring and merger agreed under the terms of the bailout. But stock markets reeled after the head of the Eurogroup, Dutch Finance Minister Jeroen Dijsselbloem, suggested that the deal could form the basis for future bailouts in the zone.

"Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach," he said.

"If we want to have a healthy, sound financial sector, the only way is to say: 'Look, there where you take the risks, you must deal with them, and if you can't deal with them you shouldn't have taken them on and the consequence might be that it is end of story'."

After European markets closed, his office clarified, saying Cyprus was "a specific case with exceptional challenges."

But by then, the damage to stock markets and the euro had been done. US stocks also tumbled on Monday.

Soon afterwards, the Cypriot finance ministry decided to postpone the reopening of all banks.

The euro recovered some of its value in later trading in New York. Early on Tuesday however, Asian markets markets followed the downward trend, dipping in the wake of Dijsselbloem's remarks.

It was in the early hours of Monday morning that Anastasiades clinched a deal with the International Monetary Fund (IMF) and European Union that threw the debt-stricken eurozone member a 10-billion-euro lifeline.

In an address to the nation after returning from the Brussels talks, he expressed confidence that Cyprus would "find its feet again."

And in the face of public outrage over the devastation of the island's prized banking sector, he vowed to open a criminal investigation into the crisis "...to find and attribute responsibility wherever it belongs."

He said he shared the "bitterness and disappointment" felt by many on the island at the attitude of "some of our respected partners" in the eurozone. But he insisted that quitting the single currency was not the answer.

The deal averts a chaotic eurozone exit for the island – but at a heavy price. Depositors in the two biggest banks – many of them Russian – will pay huge levies on deposits over 100,000 euros ($130,000). The deal also effectively shuts down Laiki, the island's second-largest lender.

Part of Laiki is to be merged with Bank of Cyprus, whose larger depositors will face a "haircut" of 30 per cent, government spokesman Christos Stylianides said.

The European Central Bank announced that in light of the deal it would continue emergency funding of the two banks, which it had been threatening to cut off.

The banks' merger is likely to lead to major job losses in a sector that had been one of the few growth areas in the island's economy. Credit to consumers and small businesses is also set to dry up.

"We are expecting a deep recession and a rise in unemployment," Cypriot Labour Minister Harris Georgiades told Tuesday's edition of the German daily Bild.

The Eurogroup expected Cyprus to correct all the imbalances in its economy at a stroke, he said. It would be the nation's citizens and businesses that would bear the brunt.

"I have to say that the Eurogroup has also made mistakes. Some decisions were taken and then modified. And the messages that we received were often contradictory."

But wealthy eurozone governments such as France and Germany had refused to bail out Cyprus unless it agreed to end what they regarded as a "casino" financial sector dependent on hot money from countries such as Russia. The deal spares all depositors with less than 100,000 euros in the island's banks, a key condition missing from a previous agreement the Cypriot parliament rejected last week.

Economists have forecast the Cyprus economy could now contract by at least 10 per cent this year and by 8.0 per cent in 2014. AFP



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