Cyprus sets up tight banking controls

As banks reopen, withdrawals are a major concern

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NICOSIA, Cyprus -- The Cypriot government announced severe restrictions Wednesday on access to funds held in the country's banks, hoping to curb what is nonetheless likely to be a rush to withdraw money when the banks open today for the first time in nearly two weeks.

The measures, which are supposed to be in effect for only a week but could be extended, will prohibit electronic transfers of money from Cyprus to other countries. In addition, individuals will not be allowed to take more than 3,000 euros in cash outside the country, well below the current ceiling of 10,000 euros, or $13,000.

The cap on withdrawals from ATMs will rise to 300 euros per day from 100 euros, but credit and debit card charges will be capped at 5,000 euros per person per month. Banks will not cash checks, though they will accept checks as deposits. Bank clients also will not be able to withdraw money from fixed-term deposits before their maturity date.

"This is a typical set of exchange control measures, more reminiscent of Latin America or Africa," said Bob Lyddon, the general secretary of IBOS, an international banking association. "There is no way these will only last seven days. These are permanent controls until the economy recovers."

To make sure enough cash is on hand, the European Central Bank sent an airplane filled with about 1.5 billion euros in a container to Larnaca airport near Nicosia on Wednesday afternoon. The container was loaded onto a truck and escorted by police cars to the Cypriot central bank for safekeeping, said a person with knowledge of the operation, who requested anonymity because he was not authorized to speak publicly.

The person said the ECB had indicated that it would continue flying cash to the country as needed to meet banks' needs.

The Cypriot Finance Minister Michalis Sarris said Wednesday that a flood of withdrawals was bound to happen quickly anyway, but that the restrictions would at least help stem a mass flight of deposits.

"Each day that banks remain closed creates more uncertainty and more difficulties for people, so we would like to do our utmost to make sure that this new goal that we have set will work," Mr. Sarris said.

Despite those strictures, the Cypriot authorities are bracing for as much as 10 percent of the 64 billion euros on deposit in the country's banks to be pulled out today.

Some experts predict a much bigger bank run whenever the controls are eventually lifted.

"If you don't impose the controls, the money is going to fly," said Mujtaba Rahman, a senior analyst at Eurasia Group. "But when you remove those controls, clearly the money is going to leave anyway. So they're in a Catch-22."

The chief executive of Bank of Cyprus, the nation's largest bank, was fired Wednesday by the central bank. He will be replaced by an administrator overseeing the bank's consolidation. That move came in consultation with the troika of international lenders -- the European Commission, the European Central Bank and the International Monetary Fund -- that are finalizing the terms of a 10 billion-euro bailout of the heavily indebted country.

Meanwhile, President Nicos Anastasiades opened a criminal investigation into how the country's banks had been brought to the brink of collapse. His aim, he said, was "to find and attribute responsibility wherever it belongs."

Thousands of employees will lose their jobs at Laiki Bank, the country's second-largest bank, which is being wound down. And the freezing of accounts at all banks since March 16 means businesses have not been able to pay their employees. Importers also have not been able to pay their bills, raising concerns about shortages of basic goods on an island that imports almost everything it consumes.

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