By Michele Kambas and Karolina Tagaris
NICOSIA (Reuters) - Cyprus is introducing "very temporary" restrictions on capital flows when banks reopen this week, the island's president said on Monday, seeking to reassure panicked Cypriots that a bailout deal struck overnight was in their best interests.
The step follows a last-ditch deal with international lenders on a 10-billion euro rescue plan to avoid economic meltdown, with Cyprus agreeing to close down its second-largest bank and inflict heavy losses on big depositors.
Without an agreement, Cyprus had faced certain banking collapse on Monday and potential exit from the European single currency. It still risks a run on banks when they reopen their doors this week. The two biggest stay shut until Thursday, but the rest will be open from Tuesday.
"The agreement that we reached is difficult but, under the circumstances, the best that we could achieve," newly elected conservative head of state Nicos Anastasiades said in a televised address to the nation on his return from fraught negotiations with the European Union, European Central Bank and International Monetary Fund in Brussels.
He said the Cypriot central bank would implement capital controls on bank transactions, anticipating a run on deposits by Cypriots and foreigners fearing for the safety of their money.
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But the president added: "I want to assure you that this will be a very temporary measure that will gradually be relaxed."
Many larger investors face steep losses they cannot avoid.
Backed by euro zone finance ministers, the bailout plan will spare the Mediterranean island a financial catastrophe by winding down the largely state-owned Popular Bank of Cyprus , also known as Laiki, and shifting deposits under 100,000 euros to the Bank of Cyprus to create a "good bank", leaving problems behind in, effectively, a "bad bank".
Deposits above 100,000 euros in both banks, which are not guaranteed by the state under EU law, will be frozen and used to resolve Laiki's debts and recapitalise the Bank of Cyprus, the island's biggest, through a deposit/equity conversion.
BILLIONS RAISED
The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.
Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution - setting a precedent for the euro zone.
An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned.
A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits.
The Central Bank of Cyprus said both Bank of Cyprus and Laiki would remain shut until Thursday, while all other lenders would reopen on Tuesday, just over a week after the government ordered them to close their doors to halt a run on deposits. (Additional reporting by Luke Baker, John O'Donnell, Robin Emmott, Philip Blenkinsop and Rex Merrifield in Brussels, Michele Kambas, Karolina Tagaris, Costas Pitas in Nicosia and Lionel Laurent in Paris; Writing by Paul Taylor; Editing by Giles Elgood and Alastair Macdonald)