Cyprus keeps banks closed

NICOSIA, Cyprus – Cyprus ordered banks to remain closed for two more days over fears of a run by customers trying to get their money out, after striking a pre-dawn bailout deal Monday that averted the country’s bankruptcy.

ATMs have been dispensing cash but often run out, and an increasing number of stores and other businesses have stopped accepting credit or debit cards. The two largest lenders, the struggling Laiki and Bank of Cyprus, have imposed a daily withdrawal limit of $130.

Cyprus clinched an eleventh-hour deal with the 17-nation eurozone and the International Monetary Fund early Monday for a $13 billion bailout. Without it, the country’s banks would have collapsed, dragging down the economy and potentially pushing it out of the euro.

Under the deal, the country agreed to slash its oversized banking sector and inflict hefty losses on large depositors in troubled banks.

The country’s banks have been closed since March 16 to avert a run on deposits as the country’s politicians struggled to come up with a way to raise enough money to qualify for the bailout.

But with the immediate crisis averted, worry spread across Europe that the deal could boomerang, spooking investors and hurting the eurozone’s efforts to keep its debt crisis from spreading.

“The Cypriot bailout has a powerful legacy which may alter the security with which depositors elsewhere in the eurozone view the safety of banks,” said Jane Foley, an analyst at Rabobank International.

The initial plan to seize a percentage of all deposits sent jitters across the eurozone. European officials, anxious to prevent any further spread of the financial crisis that has already left Greece, Ireland and Portugal dependent on bailout funds, had been at pains to point out that Cyprus was a unique case.

The country of about 800,000 people has a banking sector eight times larger than its gross domestic product, with nearly a third of the roughly 68 billion euros in the country’s banks believed to be held by Russians.

Jeroen Dijsselbloem, the Dutch finance minister who chairs the Eurogroup gathering of the eurozone’s finance ministers, said Monday that inflicting losses on the banks’ shareholders, bondholders and large depositors should become the eurozone’s default approach for dealing with ailing lenders.

“If I finance a bank and I know if the bank will get in trouble I will be hit and I will lose money, I will put a price on that,” Dijsselbloem said in a joint interview with the Financial Times and Reuters. “I think it is a sound economic principle. And having cheap money because the risk will be covered by the government, and I will always get my money back, is not leading to the right decisions in the financial sector.”

However, forcing losses on large deposits could encourage investors to pull money out of weaker southern European economies.

After a whirlwind of nervous market reactions, Dijsselbloem issued a terse clarifying statement, saying Cyprus was “a specific case with exceptional challenges which required the bail-in measures.”