NICOSIA, Cyprus - All banks in Cyprus except the two largest in the country are to reopen for business Tuesday, more than a week after they shut down to prevent a drain on deposits by customers worried they would lose part of their savings.
The decision to reopen the banks at 8:30 a.m. Tuesday morning was announced after a deal was clinched in the early hours of Monday in a Brussels meeting between the 17-nation eurozone's finance ministers. Cyprus agreed to slash its oversized banking sector and inflict hefty losses on large depositors in troubled banks to secure the 10 billion euro ($13 billion) bailout.
The deal came less than 24 hours before the European Central Bank was to pull emergency funding for Cypriot banks, which it gives to the Central Bank of Cyprus to distribute. That would have led to the banks' collapse, dragging down the rest of the economy and potentially forcing the country out of the euro.
Students hold placards the ones on the right reads in Greek “we don't sell out” during a parade for Greek independence day celebrations at the southern port city of Limassol, Cyprus, Monday. Cyprus secured what its politicians described as a “painful” solution to avert imminent bankruptcy, agreeing early Monday to slash its oversize banking sector and make large account holders take losses to help pay to secure a last-minute euro10 billion bailout.
Several hours after the deal in Brussels was first announced, the European Central Bank dropped its threat, saying it "decided not to object" to the Central Bank of Cyprus continuing to provide emergency credit.
As part of the reopening process, a central bank official said Laiki, which will be restructured, and Bank of Cyprus will remain closed until Thursday, and a withdrawal limit from their ATMs of 100 euros ($130) a day will also remain in place until then. There will be no restrictions on transactions in the other banks.
Financial institutions in the country have been shut since March 16 as Cyprus and its international lenders struggled to agree on a plan to raise funds so the island could qualify for a bailout package.
Account holders were alarmed when officials announced just over a week ago that in order for Cyprus to qualify for its bailout, it would raise funds by taking up to 10 percent of all bank deposits. Lawmakers soundly rejected the plan, and banks remained shut while politicians came up with an alternative.
Under the new plan agreed in Brussels, the bulk of the funds will be raised by forcing losses on accounts of more than 100,000 euros in Laiki and Bank of Cyprus, with the remainder coming from tax increases and privatizations.
Bond-holders, people and businesses with more than 100,000 euros in their accounts at Laiki face significant losses. The bank will be dissolved immediately into a 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 euros 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.
It is not yet clear how severe the losses would be to Laiki's large bank deposit holders, but the euro finance ministers noted the restructure expected to yield 4.2 billion euros ($5.4 billion) overall. Analysts have estimated investors might lose up to 40 percent of their money.
Although Cyprus has escaped the specter of imminent bankruptcy, the mood in Nicosia was somber.
"This decision is painful for the Cypriot people. This decision was a defeat of solidarity, of social cohesion, which are fundamental freedoms, fundamental principles of the European Union," Parliament President Yiannakis Omirou told AP.
"So as soon as possible we have to prepare our economy to go out from the mechanism and the troika," he said, referring to the bailout agreement and the three-member delegation from the European Commission, International Monetary Fund and ECB who oversee implementation of bailout measures.
Ordinary Cypriots were trying to be optimistic.
"We believe in our people. People will work hard so we can stand on our feet again," said Nicosia resident Nicos Andreou Theodorou.
Jeroen Dijsselbloem, the Dutch minister who chairs the Eurogroup, said the move to inflict losses on banks' shareholders, bondholders and even owners of large deposits should become the bloc's default approach for dealing with ailing lenders. EU officials had said previously that it was a "unique step."
His comments caused a sharp drop in bank stocks across Europe, particularly in financially weak countries like Italy and Spain.
German Chancellor Angela Merkel insisted that "the result that was found is right."
"It also makes those who helped cause these undesirable developments play their part. That is how it should be," she said.
Germany has long insisted Cypriot banks, which attracted foreign investors with high interest rates, needed to contribute to the bailout.