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March 25, 2013 10:51 pm
The Cypriot government said it was imposing “very temporary” capital controls to prevent a sudden outflow of money from its banks which will begin to reopen on Tuesday.
Speaking after he agreed a €10bn international bailout that includes the restructuring of Cyprus’s two biggest lenders, with losses for bigger depositors, President Nicos Anastasiades said restrictions would be a “very temporary measure that will be gradually relaxed”.
The measures were expected to include restrictions on withdrawals, as well as the ability to move money across borders.
Jeroen Dijsselbloem, the Dutch finance minister who heads the eurogroup, said in an interview with the FT that capital controls will be applied in a “differentiated” manner, meaning each Cypriot bank will have different rules and are likely to open on different days.
“The troika and local authorities and the Central Bank of Cyprus will today evaluate what is necessary,” he said. “The legal framework is there.”
After 10 days of bank closures, the Cypriot government said that all banks on the island would stay shut until Thursday, including the beleaguered Bank of Cyprus and Laiki.
The latter two banks were at the centre of a €10bn rescue agreed early Monday morning with international lenders in Brussels. As part of the agreement, Laiki will be wound down with deposits of less than €100,000 merged with the larger Bank of Cyprus. Deposits of more than €100,00 are set to face losses of 30 per cent or more under the plan.
In a televised address to the nation, Mr Anastasiades defended the deal reached after long and fraught negotiations in Brussels. "The agreement that we reached is difficult but, under the circumstances, the best that we could achieve," he said.
The European Central Bank called for “steadfast implementation” of the plan. It said it decided not to object to the further provision of central bank liquidity to the island’s banks. Last week the ECB said it would cut off the liquidity lifeline unless a bailout and restructuring was agreed.
The disruption to the banking system has already wreaked havoc on ordinary Cypriots, throwing into doubt basic transactions, such as paying rent and receiving pay cheques. Businesses and consumers are likely to face more hardship ahead.
With Monday a public holiday, businesses were generally closed and Nicosia was peaceful after a tumultuous week in which the government and its lenders wrestled over the terms of a deal right up to a Monday deadline imposed by the European Central Bank – after which it threatened to remove its support for Laiki.
Any relief that citizens felt at the country avoiding a chaotic debt default was tempered by the knowledge that the offshore financial sector that has propelled its economy for more than three decades would soon be hollowed out. Several economists predicted the economy would suffer a double-digit contraction this year, while a public debate was beginning on the merits of the country’s membership in the single currency.
Michael Sarris, the finance minister, acknowledged the high prices of the bailout, saying: “’People will have to go through some tough times and suffer the consequences of a protracted period when wrong decisions were made.” He argued that the country should now focus its attention on trying to develop natural gas reserves.
Additional reporting by Peter Spiegel and James Wilson
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