Cypriot businesses rue cost of rescue

NICOSIA, March 28 (Reuters) - Christakis Petsas counts the cost of the turmoil in Cyprus in terms of cars - 40 of them, stuck at the port in the coastal town of Limassol and costing him 800 euros a day in lost earnings.

That's 12,000 euros ($15,000) since banks in Cyprus closed their doors almost two weeks ago and refused to transfer the import tax payment on the new fleet of vehicles for Petsas Rent-A-Car of Nicosia.

Banks reopened on Thursday, but the ripple effect of their closure and the tough terms of a rescue deal that saved Cyprus from bankruptcy will strangle business on the island for a long time to come.

"The situation is tragic," said Petsas, a veteran of the 1974 Cypriot war that left the island divided between Greeks and Turks.

"I lived through the war as a soldier and I've never seen people so anxious. Back then you knew who the enemy was. These days you don't know whom you're fighting, or what tomorrow will bring."

Cyprus imposed strict restrictions on banking on Thursday to avert a run on banks by panicked depositors - Cypriots and wealthy foreigners - in the wake of a bailout deal struck with the European Union to save the island from bankruptcy.

The deal will close Cyprus Popular Bank, known as Laiki, the country's second biggest bank and one of Petsas' biggest clients.

It will hurt the country's reputation as a haven for offshore financing, shrink its outsize banking sector and likely condemn the island to a prolonged economic slump - all as the price of staying part of the 17-nation euro currency bloc.

The bank shutdown has starved the economy of cash, meaning Petsas has to pay his 56 employees by cheque, which they will be unable to cash under the capital controls imposed by the government.

They, in turn, will rein in spending.

"This whole situation has caused a chain reaction in the economy," said Petsas, a stocky Greek Cypriot in his late 50s whose father started Petsas Rent-A-Car in 1963.

CAPITAL FLIGHT

Imports have ground to a halt since the banks closed and businesses have suffered as customers hoard cash.

Bank transfers ceased and suppliers demanded cash. One restaurant owner on the Nicosia's main pedestrian thoroughfare, Ledra Street, apologised that sparkling mineral water was off the menu. The bottles were stuck at customs.

"We've had no sales, it's dead," said Haralambos Kaldelis, who owns a clothing boutique in the capital, Nicosia. "We have to pay rent, and there's no money. The VAT (sales tax) needs to be paid, and there's no money."

"Before, the banks would let you go over your limit, but what about now?"

Cyprus's banks were crippled by their exposure to Greece, where Europe's debt crisis began.

Fearing a massive flight of capital, the government says it will keep the capital controls in place for a month, but economists say they will likely remain for much longer until at least the shoots of a recovery emerge.

The Central Bank says it will scrutinize all major commercial transactions, limit transfers abroad and demand proof that businesses are paying for imports, not funnelling funds out of the country. Banks will not cash cheques, and customs officers will stop anyone trying to take more than 1,000 euros out of the country.

Many foreign depositors, who took advantage of Cyprus's generous offshore banking industry, have already voted with their feet.

Figures published by the island's Central Bank on Thursday showed that savers from other countries using the euro withdrew 18 percent of their deposits in February, as talk of a tax on bank accounts gained ground.

Big depositors with over 100,000 euros in Cypriot banks stand to take a big hit under the terms of the bailout, an unprecedented step in Europe's handling of a debt crisis that has spread from Greece, to Ireland, Spain, Portugal and Italy.

Cypriots have been stunned by the pace of the unfolding drama, having elected conservative President Nicos Anastasiades barely a month ago on a mandate to secure the bailout.

Many say they feel little relief to have sealed the rescue package, seeing in the capital controls the emergence of a two-tier euro zone and a brake on any potential recovery.

"I was expecting a rise in revenue this year from tourists, maybe about five percent, mainly Russians," said Petsas. "But the situation has hurt our image and many will think twice about visiting," he said.

Cyprus, he said, will have to muddle through.

"We Cypriots are survivors by nature," he said. "We'll get through this."

Christakis Petsas counts the cost of the turmoil in Cyprus in terms of cars - 40 of them, stuck at the port in the coastal town of Limassol and costing him 800 euros a day in lost earnings.

That's 12,000 euros ($15,000) since banks in Cyprus closed their doors almost two weeks ago and refused to transfer the import tax payment on the new fleet of vehicles for Petsas Rent-A-Car of Nicosia.

Banks reopened on Thursday, but the ripple effect of their closure and the tough terms of a rescue deal that saved Cyprus from bankruptcy will strangle business on the island for a long time to come.

"The situation is tragic," said Petsas, a veteran of the 1974 Cypriot war that left the island divided between Greeks and Turks.

"I lived through the war as a soldier and I've never seen people so anxious. Back then you knew who the enemy was. These days you don't know whom you're fighting, or what tomorrow will bring."

Cyprus imposed strict restrictions on banking on Thursday to avert a run on banks by panicked depositors - Cypriots and wealthy foreigners - in the wake of a bailout deal struck with the European Union to save the island from bankruptcy.

The deal will close Cyprus Popular Bank, known as Laiki, the country's second biggest bank and one of Petsas' biggest clients.

It will hurt the country's reputation as a haven for offshore financing, shrink its outsize banking sector and likely condemn the island to a prolonged economic slump - all as the price of staying part of the 17-nation euro currency bloc.

The bank shutdown has starved the economy of cash, meaning Petsas has to pay his 56 employees by cheque, which they will be unable to cash under the capital controls imposed by the government.

They, in turn, will rein in spending.

"This whole situation has caused a chain reaction in the economy," said Petsas, a stocky Greek Cypriot in his late 50s whose father started Petsas Rent-A-Car in 1963.

CAPITAL FLIGHT

Imports have ground to a halt since the banks closed and businesses have suffered as customers hoard cash.

Bank transfers ceased and suppliers demanded cash. One restaurant owner on the Nicosia's main pedestrian thoroughfare, Ledra Street, apologised that sparkling mineral water was off the menu. The bottles were stuck at customs.

"We've had no sales, it's dead," said Haralambos Kaldelis, who owns a clothing boutique in the capital, Nicosia. "We have to pay rent, and there's no money. The VAT (sales tax) needs to be paid, and there's no money."

"Before, the banks would let you go over your limit, but what about now?"

Cyprus's banks were crippled by their exposure to Greece, where Europe's debt crisis began.

Fearing a massive flight of capital, the government says it will keep the capital controls in place for a month, but economists say they will likely remain for much longer until at least the shoots of a recovery emerge.

The Central Bank says it will scrutinize all major commercial transactions, limit transfers abroad and demand proof that businesses are paying for imports, not funnelling funds out of the country. Banks will not cash cheques, and customs officers will stop anyone trying to take more than 1,000 euros out of the country.

Many foreign depositors, who took advantage of Cyprus's generous offshore banking industry, have already voted with their feet.

Figures published by the island's Central Bank on Thursday showed that savers from other countries using the euro withdrew 18 percent of their deposits in February, as talk of a tax on bank accounts gained ground.

Big depositors with over 100,000 euros in Cypriot banks stand to take a big hit under the terms of the bailout, an unprecedented step in Europe's handling of a debt crisis that has spread from Greece, to Ireland, Spain, Portugal and Italy.

Cypriots have been stunned by the pace of the unfolding drama, having elected conservative President Nicos Anastasiades barely a month ago on a mandate to secure the bailout.

Many say they feel little relief to have sealed the rescue package, seeing in the capital controls the emergence of a two-tier euro zone and a brake on any potential recovery.

"I was expecting a rise in revenue this year from tourists, maybe about five percent, mainly Russians," said Petsas. "But the situation has hurt our image and many will think twice about visiting," he said.

Cyprus, he said, will have to muddle through.

"We Cypriots are survivors by nature," he said. "We'll get through this."