Cyprus reopens banks, under strict restrictions

By Karolina Tagaris and Michele Kambas

NICOSIA (Reuters) - Cypriots are expected to descend in their thousands on Thursday on banks, which reopen with tight controls imposed on transactions to prevent fleeing depositors from cleaning out the vaults in a catastrophic bank run.

The east Mediterranean island fears a stampede at banks almost two weeks after they were shut by the government as it negotiated a 10 billion euro ($12.78 billion) bailout package with the European Union to escape financial meltdown.

The rescue deal is the first in Europe's single currency zone to impose losses on bank depositors, raising the prospect that savers will panic and scramble to get at their cash.

Authorities insist that strict rules imposed to prevent a bank run will be temporary, but economists say they will be difficult to lift as long as the economy is in crisis.

On Wednesday night, container trucks loaded with cash pulled up inside the compound of the central bank in the capital Nicosia to prepare for the reopening, a Cyprus central bank source said. A helicopter hovered overhead and police with rifles were stationed around the compound.

As in all countries that use the euro, Cyprus's central bank supplies cash for its banks from the European Central Bank in Frankfurt. Officials have promised that enough funds will be on hand to meet demand. The ECB did not comment on reports it had sent extra cash to the island.

Strict controls, contained in a Finance Ministry decree, limit cash withdrawals to no more than 300 euros per day, ban the cashing of cheques and bar businesses from transferring money abroad unless they can show it is for imports.

The island's central bank will review all commercial transactions over 5,000 euros and scrutinize transactions over 200,000 euros on an individual basis. People leaving Cyprus can take only 3,000 euros with them.

With just 860,000 people, Cyprus has some 68 billion euros in its banks - a vastly outsized financial system that attracted deposits from foreigners as an offshore haven but foundered after investments in neighboring Greece went sour.

The European Union and International Monetary Fund concluded that Cyprus could not afford a rescue unless it imposed losses on depositors, previously seen as anathema.

"CYPRUS EURO"

Cyprus's financial difficulties have sent tremors through the already fragile single European currency. The imposition of capital controls has led economists to warn that a second-class "Cyprus euro" could emerge, with funds trapped on the island less valuable than euros that can be freely spent abroad.

The authorities say they can avoid that by lifting controls quickly. They have been imposed initially for just four days.

"The rationale is that these measures will be reviewed on a daily basis, so if there is the possibility of relaxing them we will," Yiangos Demetriou, head of internal audit at the Central Bank, told state television.

But many experts are skeptical. A Reuters poll of economists this week showed 30 out of 46 said the controls would last months, while 13 expected they would endure a matter of weeks. Three said they could last years.

"This is a typical set of exchange control measures, more reminiscent of Latin America or Africa," said Bob Lyddon, General Secretary of the international banking association IBOS.

"There is no way these will only last seven days," he said. "These are permanent controls until the economy recovers."

The bailout deal, hammered out in fraught overnight negotiations in Brussels on Monday, looks set to push Cyprus deeper into an economic slump, shrink the banking sector and cost thousands of jobs.

The island's second largest bank, Cyprus Popular Bank will be closed and its guaranteed deposits of up to 100,000 euros transferred to the biggest bank, Bank of Cyprus.

Deposits of more than 100,000 euros at both banks, too big to enjoy a state guarantee, will be frozen, and some of those funds will be exchanged for shares issued by the banks to recapitalize them.

The big depositors will lose money, but the authorities say deposits up to 100,000 euros will be protected, a reversal from an earlier plan that would have hit small depositors as well but was vetoed by Cyprus's parliament last week.

European leaders said the bailout deal averted a chaotic national bankruptcy that might have forced Cyprus out of the euro. Many Cypriots say the deal was foisted upon them by Cyprus's partners in the 17-nation euro zone, and some have taken to the streets to vent their frustration.

On Wednesday, some 2,500 people rallied outside the offices of conservative President Nicos Anastasiades, waving banners and flags. They chanted: "I'll pay nothing; I owe nothing."

For now, residents say they are confused and worried by the capital controls, and wonder how they will affect daily life.

A 42-year-old Romanian hotel maid, who gave her name as Maria, said she was worried she would not be able to cash her pay cheque due on Friday. The hotel, she said, was unable to pay staff in cash because most guests paid by credit card.

"What shall I do?" she asked. "Hold up the cheque and look at it?"

(Additional reporting by Laura Noonan and Costas Pitas; Writing by Matt Robinson; Editing by Peter Graff)

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