Cyprus businesses hurt as banks stay shut

Cypriot businesses are under increasing strain to keep running after financial authorities close banks for second week amid fears of a run on deposits.

NICOSIA // Cypriot businesses were under increasing strain to keep running yesterday after financial authorities stretched the country's bank closure into a second week amid fears that depositors will rush to drain their accounts.

Cyprus's central bank governor, Panicos Demetriades, said "superhuman efforts are being made" to open banks tomorrow.

"Temporary" restrictions will be imposed on financial transactions once the banks do, he said, but would not specify what those restrictions would be or how long they would be in place for.

"We have to restore the public's trust in banks," he said.

All but two of the country's largest lenders had been due to reopen yesterday, after being shut since March 16 to stop savers from withdrawing all their money from the banks while politicians figured out how to raise the funds necessary for Cyprus to qualify for an international bailout.

However, the central bank made a surprise reversal just before midnight, announcing all banks would remain closed until tomorrow.

The original idea had been not to impose restrictions if the banks opened yesterday, Mr Demetriades said, "but now we're obligated to do so" because as each day goes by, more people would want to pull their money out.

"We have to all understand that we live in very critical times, officials of the government and the central bank are working day and night," he said.

Under the deal for a €10 billion euro (Dh47billion) rescue clinched in Brussels early Monday, Cyprus agreed to slash its oversized banking sector and inflict hefty losses on large depositors in troubled banks.

The bulk of the funds will be raised by forcing losses on accounts of more than €100,000 euros in the country's second- largest lender, Laiki, with the remainder coming from tax increases and privatizations.

The bank will be dissolved immediately into a so-called bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation's biggest lender, Bank of Cyprus.

Deposits at Bank of Cyprus above €100,000 will be frozen until it becomes clear whether or to what extent they will also be forced to take losses. Those funds will eventually be converted into bank shares.

A top European Central Bank official, Benoit Coeure, who sits on the bank's six-member executive board, told France's Europe 1 yesterday that the plan to keep the banks closed was sensible as "there is still a lot of work to do on the ground".

Nonetheless businesses have already been feeling the brunt of the cash crunch, unable to pay salaries and suppliers as Cypriots has slashed spending to keep as much money on them in light of all the uncertainty surrounding the banks.

"Cash is definitely a problem," said Nicosia pharmacist Lucy Santourian, counting out euro bills to a supplier who had just brought in new supplies of baby formula and other products. "We normally pay 90 per cent of our suppliers on credit, once a month at the end of the month. Now most are asking for cash only."

The retail market is sharply down too, shop owners say, with customers unwilling to spend on anything but the basics while they have limited access to cash.

Also yesterday, the chairman of the board of Bank of Cyprus, Andreas Artemis, tendered his resignation, a spokesperson for the bank said.