Cyprus has extended the closure of its banks for two more days — until Thursday — a sudden postponement that comes after the country’s leaders spent days struggling to come up with a plan to raise the money needed to secure an international bailout.

Banks in the country have already been closed for more than a week to prevent a run on deposits. All except the country’s two largest lenders had been due to open Tuesday morning after the country clinched an eleventh-hour deal with the 17-nation eurozone and the International Monetary Fund to provide Cyprus with a bailout. 

Without that deal, the country’s banks would have collapsed, dragging down the economy and potentially pushing it out of the eurozone.

Cyprus bailout deal prompts investor relief

The decision to keep banks closed two more days was announced late Monday.

The Central Bank said that "for the smooth functioning of the entire banking system, the finance minister has decided, after a recommendation by the governor of the Central Bank, that all banks remain shut up to and including Wednesday."

Fight to find money

Banks have been closed since March 16 to avert a run on deposits as the country’s politicians struggled to come up with a way to raise enough funds to qualify for the bailout.

An initial deal that would have seized up to ten per cent of people’s bank accounts spooked depositors and was soundly rejected by lawmakers early last week.

Cyprus bailout deal at a glance
  • Cyprus had to come up with €5.8 billion somehow to secure the bailout.
  • Depositors in the country's second-largest bank, Laiki, with accounts of more than €100,000 will lose an unspecified amount of their money.
  • The move is expected to yield €4.2 billion overall — or most of the needed amount.
  • The remainder of the money will come from tax increases and privatizations.
  • Cyprus had to agree to restructure its banking sector, which is unusually large for the size of its economy.
  • Laiki will be dissolved at once and split into a "good bank" and a "bad bank." The "good bank" portion of Laiki will be folded into the largest bank, the Bank of Cyprus. -Associated Press

ATMs have been functioning, but many run quickly out of cash, and a daily withdrawal limit of 100 euros was imposed on the two largest lenders, Bank of Cyprus and Laiki. 

Under the deal reached in the early hours of Monday morning in Brussels, 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 US) bailout.

The new plan allows for the bulk of the funds to 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.

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 US) overall. Analysts have estimated investors might lose up to 40 per cent of their money. 

The country's second-largest bank, Cyprus Popular Bank — also known as Laiki — will be shut down immediately for restructuring, with all bond holders and people with more than €100,000 in their bank accounts there facing significant losses. The measures are likely to deepen the recession in Cyprus and lead to more job losses.

The other top bank, Cyprus Central Bank, will reopen on Thursday, according to Reuters, citing a bank source.

All other banks will reopen on Tuesday, the source said.

Cyprus avoids 'disastrous exit' from eurozone

The announcement to keep all banks closed comes after Cyprus secured a €10 billion ($13 billion US) package of rescue loans in tense, last-ditch negotiations, saving the country from a banking system collapse and bankruptcy that could have destabilized the entire euro area.

"It's not that we won a battle, but we really have avoided a disastrous exit from the eurozone," said Cyprus' Finance Minister Michalis Sarris. "A long period of uncertainty and insecurity surrounding the Cyprus economy has ended."

The eurozone finance ministers accepted the plan, reached after more than ten hours of negotiations in Brussels between Cypriot officials and the so-called troika of creditors — the International Monetary Fund, the European Commission and the ECB.

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Cyprus's Finance Minister Michalis Sarris holds a news conference at the end of a Eurogroup meeting. In return for the bailout, Cyprus must drastically shrink its outsized banking sector, cut its budget, implement structural reforms and privatize state assets. (Sebastian Pirlet/Reuters)

"We believe that this will form a lasting, durable and fully financed solution," said IMF chief Christine Lagarde.

Without a bailout deal by Monday night, the tiny nation of about 800,000 would have faced the prospect of bankruptcy, which could have forced it to become the first country to abandon the euro currency. That would have roiled markets and spurred turmoil across the entire eurozone of 300 million people, analysts said, even though Cyprus only makes up less than 0.2 percent of the eurozone's 10 trillion euro economy.

After the eurozone's finance ministers' approval, several national parliaments in eurozone countries such as Germany must also approve the bailout deal, which might take another few weeks. EU officials said they expect the whole program to be approved by mid-April.