NICOSIA, Cyprus -- Big depositors at Cyprus' largest bank might be forced to accept losses of up to 60 percent, far more than initially estimated under the European rescue package to save the country from bankruptcy, officials said Saturday.
Deposits of more than 100,000 euros ($128,000) at the Bank of Cyprus will lose 37.5 percent in money that will be converted into bank shares, according to a central bank statement. In a second raid on these accounts, depositors also could lose up to 22.5 percent more, depending on what experts determine is needed to prop up the bank's reserves. The experts will have 90 days to figure that out.
The remaining 40 percent of big deposits at the Bank of Cyprus will be "temporarily frozen for liquidity reasons," but continue to accrue existing levels of interest, plus another 10 percent, the central bank said.
The savings converted to bank shares would theoretically allow depositors to eventually recover their losses, but the shares now hold little value and it's uncertain when -- if ever -- the shares will regain a value equal to the depositors' losses.
Emergency laws passed last week empower Cypriot authorities to take these actions.
Analysts said Saturday that imposing bigger losses on Bank of Cyprus customers could further squeeze already crippled businesses as Cyprus tries to rebuild its banking sector in exchange for the international rescue package.
Sofronis Clerides, an economics professor at the University of Cyprus, said: "Most of the damage will be done to businesses which had their money in the bank" to pay suppliers and employees. "There's quite a difference between a 30 percent loss and a 60 percent loss." With businesses shrinking, Cyprus could be dragged down into an even deeper recession, he said.
Clerides accused some of the 17 European countries that use the euro of wanting to see the end of Cyprus as an international financial services center and to send the message that European taxpayers will no longer shoulder the burden of bailing out problem banks. However, German Finance Minister Wolfgang Schaeuble challenged that notion, insisting in a report in Saturday's Bild daily newspaper that "Cyprus is and remains a special, isolated case" and doesn't point the way for future European rescue programs.
Europe has demanded that big depositors in Cyprus' two largest banks -- Bank of Cyprus and Laiki Bank -- accept across-the-board losses in order to pay for the nation's 16 billion euro ($20.5 billion) bailout. All deposits of up to 100,000 are safe, meaning that a saver with 500,000 euros in the bank will suffer losses only on the remaining 400,000 euros.