04 18 2014
  6:54 pm  
     •     

LONDON (CNNMoney) -- Banks in Cyprus opened their doors Thursday for the first time in nearly two weeks with strict controls on the amount of cash people can withdraw as authorities tried to prevent money draining out of the economy following a bailout by the European Union.

Cyprus became the first eurozone country since the currency was launched on Jan. 1, 1999, to place restrictions on how much money individuals and companies can take across its borders after confidence in its outsized financial system was shaken by the bailout terms.

Queues formed outside bank branches in the capital Nicosia amid tight security but there was no evidence of panic. The controls were announced Wednesday in a bid to prevent a run on the banks, which had been shut since March 16.

Cypriots queued at cash machines during the extended bank closure as it became clear that deposits would be raided as part of the bailout by the EU and International Monetary Fund.

The tiny island nation was brought to the brink of financial collapse and possible exit from the eurozone by the losses its two biggest banks -- Bank of Cyprus and Popular Bank -- sustained on Greek government debt, which wiped out a third of their combined capital.

It turned to its eurozone partners for help and after months of negotiations signed up Monday for a 10 billion euro rescue, equivalent to nearly 60% of gross domestic product.

In return, Cyprus committed to raise billions from big depositors to fund the winding down of Popular Bank and to recapitalize Bank of Cyprus. The EU wants Cyprus to shrink its bloated banking industry to average size by 2018, meaning shedding about half its assets.

Deposits above 100,000 euros have been frozen at both banks. They could be wiped out entirely at Popular. At Bank of Cyprus, about 40% will be converted into equity.

All deposits of less than 100,000 euros are guaranteed. And the bailout does not affect smaller banks in Cyprus, which account for about 60% of the country's total deposits of 68 billion euros.

Many of those deposits belong to foreign investors, in particular Russians, and Cypriot authorities fear an uncontrolled flight of capital that would cause the economy to implode.

Credit and debit card use abroad has been limited to 5,000 euros per month, and people leaving Cyprus can only take 3,000 euros in cash each trip.

Bans on the early withdrawal of funds on term deposits and transfers of more than 5,000 euros abroad, unless approved for trade purposes, have been introduced. Checks can be paid into accounts but not cashed, and a daily withdrawal limit of 300 euros has been set.

--CNN's Ivan Watson contributed to this report from Nicosia.

 

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