Little sign of queues as bank staff turn up for work early in Nicosia and cash is delivered under heavy security
Cyprus will reopen its banks on Thursday, with strict controls to stop people cleaning out their savings in a catastrophic bank run.
However, less than an hour before it was due to open for the first time in almost two weeks, the Cyprus stock exchange said it would remain closed for the day.
The country had feared a stampede on the banks after a 12-day hiatus, as the government negotiated a €10bn (£8.4bn) bailout package to avoid financial collapse. But there was little sign of queues on Thursday morning, just a few hours before the high street banks opened, despite the fact that wealthy savers could face losses of at least 40%.
Bank staff turned up for work early in Nicosia as cash was delivered by armoured trucks under heavy security. Cash withdrawals will be limited to €300 a day – although banks in recent days have been restricting withdrawals to €100 per customer.
Yiangos Demetriou, head of internal audit at the island's central bank, told the Cypriot state broadcaster that a limit of €5,000 would be set on the use of credit cards abroad and insisted the measures would be imposed for just four days.
Anyone leaving the country will be unable to carry more than €1,000 in banknotes, while families with members studying abroad will not be able to send more than €5,000 a quarter to relatives.
It is the first time a member of the single currency has faced such emergency measures to keep cash within its borders since the euro was launched in 1999. "The rationale is that these measures will be reviewed on a daily basis, so if there is the possibility of relaxing them we will," Demetriou said.
Bob Lyddon, the general secretary of IBOS, an international banking association, described the controls as "more reminiscent of Latin America or Africa". "These are permanent controls until the economy recovers," said Lyddon, casting doubt on any suggestion the capital controls could be temporary.
The security firm G4S is sending 180 staff to bank branches across the island to ensure calm when they reopen. Armed police were on guard and a helicopter hovered overhead, as lorries said to be loaded with cash arrived at the central bank on Wednesday night. Officials have promised that enough funds will be on hand to meet demand.
The Cypriot financial sector has exploded in size to eight times the size of its €17bn economy, which has become reliant on offshore banking and Russian money. Much could hinge on the reaction of wealthy Russians who have turned to Cyprus to make huge deposits in recent years.
In the US, New York's powerful financial services industry has already benefited from a silent Cyprus bank run. "This past year, we've been seeing a shift in investments in the United States as a result of the financial state of the European Union," said Ed Mermelstein, a New York real estate lawyer who advises wealthy Russians.
Banks in Cyprus were closed 12 days ago shortly before president Nicos Anastasiades announced the terms of its bailout, which included skimming all savers to raise €5.8bn.
The terms have since been altered to ensure that those with less than €100,000 in their accounts are not forced to take a cut, in a move that the European authorities hope will restore faith in the bank guarantee scheme across the 27 EU nations.
Under the terms of the bailout with the EU, the ECB and the International Monetary Fund – known as the troika – the island's second biggest bank, Laiki, is to be closed down and savers with less than €100,000 transferred to Bank of Cyprus, the largest bank in the country.
Depositors with more than €100,000 in their accounts – the level at which savings are guaranteed across Europe – face a levy to raise billions of euros towards the bailout. According to some estimates, this could be between 40% and 80%.
In Britain, the government has been working on ways to keep Laiki's four branches being "sucked" into the Cypriot bailout although there was little indication on Wednesday night that a solution had been found for the 13,000 customers potentially affected.
Chris Pavlou, former vice chairman of Laiki, told Channel 4 news that Anastasiades was given little option by the troika but to accept the draconian terms, which force savers to take a hit for the first time in the fifth bailout of a eurozone country.
Pavlou said: "It's not very nice, actually, to see two or three people half your age – clever people – coming over there and shaking their hands at the president and saying: 'You have to do this, otherwise we bring you down.' It is very painful for someone who's just been elected to actually face that."
But the meltdown of the Cypriot financial system came as no surprise to well-connected, wealthy Russians, who bundled some of their money to the US. "Many of our clients had a heads-up on this issue," said Mermelstein. "Cyprus had started having the conversations about what it was intending, and that's been going on for half a year."
Michalis Sarris, the Cypriot finance minister, has admitted that Cypriot banks were suffering "substantial outflows" for weeks before the meltdown, indicating that Russians were already anticipating the crisis.
According to investment bankers, lawyers and wealth advisers in the US, Russians have been seeking property developments in the US over the past year. Lawyers and advisers have been making construction loans and sinking money into the concrete foundations of the big real-estate developments in Manhattan.
Six months ago, Mermelstein said, a Russian client took several million dollars from a Cyprus account and made a loan to a commercial project in New York.
After Cyprus announced an overnight bank raid into the deposits of rich customers, Mermelstein said his client "was happy the loan came out of Cyprus and doesn't have to go back any time soon". Such investments, ranging in size from $5m to $25m, have "gone up substantially", the real estate lawyer said.
With ink on the Cypriot bailout barely dry, the focus was turning to which countries might face the same fate, following Greece, Ireland, Portugal and Spain.
James Howat, European economist at Capital Economics, said: "Cyprus has shown that even the smallest members of the eurozone can rock the single currency area.
"Slovenia is probably the next country most likely to be forced into a bailout programme, but Malta and Luxembourg are also vulnerable given the size of their banking sectors relative to their economies.
"There is already evidence of market stress in Slovenia, with government bond yields rising from 4.5% to 6.5% over the last two weeks."
On Thursday, German finance minister Wolfgang Schäuble tried to limit fears of contagion, saying Cyprus was a very special case and the EU had found the right solution for it with the €10bn bailout. He said Luxembourg had a completely different business model to Cyprus and any comparison of the two would be "absurd".
Analysts at Fathom Research said that the relief surrounding the Cyprus deal would be temporary. "The relief is misplaced and will be shortlived, since the 'doom-loop' undermining the euro – between insolvent banks and their indebted sovereigns – has not been broken, but emphatically reaffirmed."
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