Large depositors at Cyprus's largest bank may be forced to accept losses of up to 60%, far more than initially feared under the European rescue package to save the country from bankruptcy, officials said.
Deposits of more than 100,000 euros (£85,000) at the Bank of Cyprus would lose 37.5% in money which would be converted into bank shares, according to a finance ministry decree obtained by The Associated Press.
In a second raid on these accounts, depositors also could lose up to 22.5% more, depending on what experts determine is needed to prop up the bank's reserves.
Deposits that are converted to bank shares would theoretically allow depositors to eventually recover their losses. But the shares now hold little value and it is uncertain when - if ever - the shares will regain a value equal to the depositors' losses.
Europe has demanded that large depositors in the country's two largest banks - Bank of Cyprus and Laiki Bank - accept across-the-board losses in order to pay for the 16 billion euro (£13.5 billion) bailout. But officials had previously spoken of a loss to big depositors of 30% to 40%.
Analysts said that imposing bigger losses on major depositors could further squeeze already crippled businesses as Cyprus tries to rebuild its banking sector in exchange for the international rescue package.
"Most of the damage will be done to businesses which had their money in the bank" to pay suppliers and employees, said University of Cyprus economics Professor Sofronis Clerides. "There's quite a difference between a 30% loss and a 60% loss." With businesses shrinking, the country could be dragged down into an even deeper recession, he said.
There is also concern that large depositors - including many wealthy Russians - would take their money and run once capital restrictions that Cypriot authorities have imposed on bank transactions to prevent such a possibility are lifted in about a month.
On Monday, Cyprus agreed to make bank depositors with accounts holding more than 100,000 euros to contribute to a financial rescue in order to secure 10 billion euros (£8.5 billion) in loans from the eurozone and the International Monetary Fund.
Cyprus needed to raise up 5.8 billion euros (£4.9 billion) on its own in order to clinch the larger package, and banks had remained shut for nearly two weeks until politicians hammered out a deal, opening again on Thursday. But fearing that savers would rush to pull their money out in mass once banks reopened, Cypriot authorities imposed a raft of restrictions including daily withdrawal limits of 300 euros (£255) for individuals and 5,000 euros (£4,200) for businesses - the first so-called capital controls that any country has applied in the eurozone's 14-year history.