Cyprus banks reopen but euro weakens

Banks in Cyprus reopen for the first time since a 10 billion euro rescue package deal as worries linger about the health of the island's financial system.

A woman holds the door of a Laiki bank branch in the Cypriot capital, Nicosia yesterday as people queue up outside waiting for the bank to open after an unprecedented 12-day lockdown.

The euro fell close to a four-month low yesterday as banks in Cyprus reopened for the first time since the country was forced to accept a €10 billion (Dh46.88bn) rescue package to avert bankruptcy.

The Mediterranean island's government imposed stringent capital controls to limit withdrawals from banks, which had been closed for nearly two weeks.

But investors remain worried about a potential capital flight in the coming weeks and that the bailout was just a bandage on wider wounds in the financial system.

"The psychological impact of the imposition of such controls will keep investor sentiment negative, especially as it remains uncertain how long they will be maintained for and unclear as to which other countries might also have to impose them in the future," wrote Tim Fox, the chief economist of Emirates NBD, in a research note.

The euro was trading at US$1.2794 to the dollar in early London trading yesterday, while investors in Europe and Asia were in subdued mood. The FTSEurofirst 300 index of top shares rose 0.2 per cent in early trading. Japan's Nikkei stock average closed down 1.3 per cent, while the MSCI index of Asia-Pacific shares outside Japan fell 0.7 per cent.

German government bonds, a popular asset for investors at times of heightened anxiety, climbed in early deals.

Lorries ferried money to Cypriot banks as lenders stockpiled cash in preparation for opening their doors to customers at noon local time.

To ease fears of nervous savers descending on banks, the government rolled out aggressive limits, expected to last at least a week, on cash flows. It is the first time a government in the euro zone has resorted to capital controls.

The reopening followed Cyprus striking an 11th-hour rescue deal on Sunday that will involve large deposit holders in the biggest banks incurring losses.

As part of an agreement to receive funds from the European Union, the European Central Bank and the IMF, Laiki Bank, Cyprus's second- largest and most troubled lender, will close, with holders of uninsured deposits above €100,000 losing up to four fifths of their savings. The losses on large deposits in Bank of Cyprus, which will remain in business, could be up to 40 per cent.

The capital controls, which will apply to all depositors in Cypriot banks, will limit total transactions on any credit or debit card and on transactions inside or outside the country at €5,000 a month. Withdrawals from bank outlets or cash machines will be capped at €300 per day. People will not be able to take more than the equivalent of €3,000 in cash out of the country per person per trip.

Signs have emerged of other troubles in the euro zone in recent days. In Italy, the government's cost of borrowing over five years rose to its highest since October at an auction on Wednesday. Lack of progress on the formation of a new Italian government, along with worries about Cyprus, weighed on sentiment.

Questions raised, b4