Cyprus reversed a decision to reopen some banks on Tuesday after world markets took fright at the implications of the multi-billion-euro bailout deal it has struck with international creditors.

A woman rides her bike past a Laiki (Popular) Bank branch on March 25, 2013, in Nicosia. Cyprus reversed a decision to reopen some banks on Tuesday after world markets took fright at the implications of the multi-billion-euro bailout deal it has struck with international creditors.

All Cyprus banks are to remain shut until Thursday, the Central Bank announced in a shock statement issued late Monday.

Finance Minister Michael Sarris had made the decision on the recommendation of the Central Bank Governor Panicos Demetriades to "ensure the smooth functioning of the entire banking system" the statement said.

Just hours earlier, the Central Bank had said all Cyprus banks except for its two biggest lenders, those worst-hit by the financial crisis, would reopen Tuesday after a 10-day lockdown for fear of a run on deposits.

In the earlier statement, it said Laiki Bank and the Bank of Cyprus would remain shut until Thursday due to their restructuring and merger under the terms of the bailout, but that all other banks would operate normally.

That earlier decision to reopen most banks had come after Cypriot President Nicos Anastasiades clinched a deal with the International Monetary Fund (IMF) and European Union (EU) that threw the debt-stricken Eurozone member a 10-billion-euro lifeline.

Under its terms, depositors in the two biggest banks will pay huge levies on deposits over 100,000 euros.

But stock markets reeled after the head of the Eurogroup, Dutch Finance Minister Jeroen Dijsselbloem, suggested that the deal could form the basis for future bailouts in the zone.

"Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach," he said.

"If we want to have a healthy, sound financial sector, the only way is to say: 'Look, there where you take the risks, you must deal with them, and if you can't deal with them you shouldn't have taken them on and the consequence might be that it is end of story."

After European markets closed, his office clarified "Cyprus is a specific case with exceptional challenges."

But by then, the damage to stock markets and the euro had been done. US stocks also tumbled on Monday.

Hours later, the Cypriot finance ministry decided to postpone the reopening of all banks. They have already been closed for 10 days to avoid a run on accounts.

Earlier Monday, Anastasiades said there had been "no easy solutions" in the marathon talks with international creditors that ended early Monday.

In an address to the nation after returning from the Brussels talks, he expressed confidence that Cyprus would "find its feet again".

And in the face of public outrage over the devastation of the island's prized banking sector, together with huge losses in savings and jobs, he vowed to open a criminal investigation into the crisis.

"I undertake in the next few days for the cabinet to appoint criminal investigators with a clear term of reference to find and attribute responsibility wherever it belongs," Anastasiades said.

The agreement he struck averts a chaotic eurozone exit for the island. But it comes at the expense of job losses in the key financial sector and a massive drying up of credit that threatens a protracted recession.

The deal with the European Union and the International Monetary Fund deals a major hit to investors and depositors in the island's biggest bank, the Bank of Cyprus, many of whom are Russian. It will also effectively shut down Laiki, its second-largest lender.

Laiki is to be wound up, with what is saved being merged with Bank of Cyprus whose larger depositors will face a "haircut" of 30 percent, government spokesman Christos Stylianides said.

The European Central Bank announced that in light of the deal it would continue its emergency funding of the two banks which it had threatened to cut off from Monday.

Their merger is likely to lead to major job losses in a sector that had been one of the few growth areas in the island's economy. Credit to consumers and small businesses is also set to dry up.

But wealthy eurozone governments such as France and Germany had refused to bail out Cyprus unless it agreed to put an end to what they regarded as a "casino" financial sector dependent on hot money from countries like Russia.

The deal spares all depositors with less than 100,000 euros ($130,000) in the island's banks, a key condition missing from a previous agreement the Cypriot parliament rejected last week.

But Cyprus could now be in for a "deep recession caused by the shrinkage of the banking sector and severe de-leveraging," or paying down of debt, UBS economist Reinhard Cluse said.

Economists have forecast the Cyprus economy could now contract by at least 10 percent this year and by 8.0 percent in 2014.

Source: AFP