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Cyrpus's second-biggest bank, Popular Bank (also known as Laiki) will be unwound, wiping out shareholders and bondholders.

YORGOS KARAHALIS/REUTERS

European Union officials are sending a clear message to any country contemplating aid to cure a Cyprus-style banking crisis: Bank creditors and customers, not European taxpayers, will foot much of the bill.

The Cyprus bailout is like no other since Greece received its first rescue three years ago. For the first time, bank creditors will be wiped out while customers with deposits of more than €100,000 ($131,000) will take severe losses.

Late Monday, the central bank of Cyprus said all banks will remain shut until Thursday, reversing its earlier decision that most banks, with the exception of the two largest, would reopen Tuesday after a week-long shutdown. The central bank said the decision was taken to ensure the "smooth functioning of the whole banking system."

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Dutch finance chief Jeroen Dijsselbloem, who heads the euro zone group of finance ministers, suggested Monday that the old bailout template is finished.

"What we've done last night is what I call pushing back the risks," he said in an interview with Reuters and The Financial Times, referring to the €10-billion bailout reached late Sunday.

"If there is a risk in a bank, our first question should be, 'Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?' If the bank can't do it, then we'll talk to shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary, the uninsured deposit holders."

As an earlier market rally stalled and stocks slipped, Mr. Dijsselbloem later added that "Cyprus is a specific case with exceptional challenges which required the bail-in."

His comments came hours after the finance ministers and the International Monetary Fund endorsed the broad outline of a rescue designed to prevent an outright banking collapse that would have destroyed the Cyprus economy, almost certainly pushing it out of the euro zone.

In exchange for a €10-billion, three-year loan from the European Union and the IMF, Cyprus agreed to a radical and swift bank restructuring that was offered on a take-it-or-leave-it basis. Had it not been accepted, the European Central Bank would have suspended the Cypriot banks' emergency liquidity injections that had kept them functioning, if only barely (the banks have been closed since March 16 for fear of a bank run).

The country's second-biggest bank, Popular Bank (also known as Laiki) will be unwound, wiping out shareholders and bondholders. Popular will be split into a "good bank" and a "bad bank." The former will get the viable assets and insured deposits, that is, deposits up to €100,000. The rest, including about €4.2-billion of deposits over €100,000, will go into the latter, with no assurances that the wealthy depositors will get any of their money back, although a 100-per-cent loss seems unlikely.

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The good bank will then be merged with the leading commercial bank, Bank of Cyprus, which, in turn, will be recapitalized by forcing losses on the bondholders and uninsured depositors. The amount of damage the uninsured bondholders will suffer is unknown, but various reports said the uninsured depositors could lose 30 to 40 per cent.

The emphasis on sharing the bailout burden with uninsured depositors "illustrates the pressures that euro-area policy makers are under to protect domestic taxpayers and impose losses on creditors of stressed sovereigns and stressed banks," said Matt Robinson, director of sovereign research at Moody's.

The terms of the bailout are considered a victory for German Chancellor Angela Merkel, who is up for re-election in September and feared burdening the German taxpayer with a hefty Cypriot bailout bill after two expensive Greek bailouts that won her no political capital. The Cypriot bailout was especially risky for her because Russians are estimated to have €25-billion on deposit in banks in Cyprus. She could not be seen to be rescuing wealthy Russian bank clients, some of whom are thought to be billionaire oligarchs.

While market reaction to the Cypriot bailout was not dramatic – the European stock markets were down marginally and the euro lost 1 per cent – Mr. Robinson said "the change in policy could yet cause contagion and may increase the cost and reduce the stability of funding in other euro-area banking systems."

Already, some Europeans fear a levy on deposits cannot be ruled out if and when another country seeks international financial assistance. At one point last week, the Cyprus bailout included a levy on all deposits, regardless of size, although the Cypriot parliament rejected that. A new survey found that 90 per cent of Spaniards fear a levy like the one that was contemplated for Cypriot depositors (Italy imposed a 0.6-per-cent levy on bank deposits in 1992 as part of a fiscal cleanup plan).

Cyprus faces years of economic misery as the costly bank rescue program is imposed on austerity measures that have already driven the economy into recession. Société Générale said Monday morning that it expects Cypriot gross domestic product to drop by 20 per cent by 2017, which would put the economy into depression territory.

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And even though capital controls are to be imposed to prevent a run on the banks, they are expected to see deposit outflows as confidence in Cyprus's financial services sector evaporates.

With a report from Reuters

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