WRAPUP 10-Cyprus leader hails bailout, but banks stay closed
* Cyprus seals deal for 10-billion euro bailout
* Deal to shut Laiki bank, transfer insured deposits
* President says capital controls to be "very temporary"
* Banks to remain closed until Thursday
By Michele Kambas and Karolina Tagaris
NICOSIA, March 25 (Reuters) - The president of Cyprus assured his people a bailout deal he struck with the European Union was in their best interests and would end anxiety, but he also announced "very temporary" capital controls to stem a run on the island's banks.
Returning on Monday from fraught overnight negotiations in Brussels, the conservative leader said the 10-billion euro ($13 billion) rescue plan agreed there in the early hours of the morning was "painful" but essential to avoid economic meltdown.
He has agreed to close down the second-largest bank, Cyprus Popular, and inflict heavy losses on big depositors, many of them Russian, after Cyprus's outsize financial sector ran into trouble when its investments in neighbouring Greece went sour.
"The agreement we reached is difficult but, under the circumstances, the best that we could achieve," Anastasiades said in a televised address to the nation on Monday evening.
"We leave behind the uncertainty and anxiety that we all lived through over the last few months and we look forward now to the future with optimism," he told compatriots who face an immediate deep recession and years of economic hardship.
Many Cypriots say they feel anything but reassured by the bailout deal, however, and fear of banks being besieged when they reopen after being shut all last week saw plans for their reopening put back until Thursday.
Little is known about the restrictions on bank transactions that Anastasiades said the central bank would impose, but he told Cypriots: "I want to assure you that this will be a very temporary measure that will gradually be relaxed."
Capital controls, preventing people moving funds out of the country, are at odds with the European Union's ideals of a common market but the government may fear an ebb tide of panic that would cause even more disruption to the economy.
Without an agreement by the end of Monday, Cyprus had faced certain banking collapse and risked becoming the first country to be pushed out of the European single currency - a fate that Germany and other northern creditors seemed willing to inflict on a nation that accounts for just a tiny fraction of the euro economy and whose banks they believed had suffered fatal hubris.
Backed by euro zone finance ministers, the plan will wind down the largely state-owned Cyprus Popular Bank, known as Laiki, and shift 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.
The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros of the 5.8 billion euros the EU and IMF had told Cyprus to raise as a contribution to the bailout, Dutch Finance Minister Jeroen Dijssebloem said.
Cyprus government spokesman Christos Stylianides told state radio that losses on uninsured depositors would be "under or around 30 percent".
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.
Dijsselbloem's comments on the need for lenders to banks to accept the potential risks of their failure had a knock-on effect in the euro zone, raising the cost of insuring holdings of bonds issued by other banks, notably in Italy and Spain.
Global equity markets and the euro retreated on his comment that the Cyprus bailout could be a template for solving other problems, by shifting more risk to depositors and stakeholders:
"What we've done last night is what I call pushing back the risks," Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times.
A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits, large and small. That proposal outraged ordinary Cypriots, leading to queues at bank cash machines.
The central bank has imposed a 100-euro daily limit on withdrawals from ATMs at the two biggest banks to avert a run.
Russia signalled it would back the bailout even though it would impose big losses on Russian depositors, who by some estimates may hold a third of all deposits in Cypriot banks.
President Vladimir Putin ordered officials to restructure a loan Moscow granted to Cyprus in 2011 - having rejected Nicosia's request for easier terms in crisis talks last week.
Prime Minister Dmitry Medvedev - who ranks below Putin - earlier criticised the bailout, voiced the anger expressed by Russian depositors, saying: "The stealing of what has already been stolen continues."
Among Cypriots sipping coffee in warm sunshine, there was a mood of wariness about the deal: "How long will it last?" asked Georgia Xenophontos, 23, a hotel receptionist in Nicosia.
"Why should anyone believe anything this government says?"
In the morning, a public holiday, residents of the capital lined the streets to watch a parade by soldiers and students to mark Greek Independence Day, waving the Greek and Cypriot flags.
"On this day I'm proud to be Greek, but at the same time I feel humiliated," said Marios Charalambous, a 56-year-old print-shop owner.
"I'm worried what will happen when the banks reopen," he said. "There's so much anger."
Turkish-speakers in the north of the island have run their own affairs since a Turkish army invasion in 1974 divided Cyprus. Only Turkey recognises the administration of the north.
Chancellor Angela Merkel, anxious to show German voters she is not wasting their taxes six months before an election, said the deal was right because it ensured that those who contributed to the crisis were required to pay towards its resolution.
"I am very pleased that a solution was found last night and that we have been able to avoid an insolvency," said Merkel. She was portrayed by some Cypriots, as by recipients of earlier EU bailouts, as an unfeeling driver of German hegemony in Europe.
A senior source in the Brussels talks said Anastasiades threatened to resign at one stage on Sunday if pushed too far.
The conservative leader, barely a month in office and wrestling with Cyprus's worst crisis since the 1974 invasion, was forced to abandon his efforts to shield big account holders.
Diplomats said the president had fought hard to preserve the country's business model as an offshore financial centre drawing huge sums from wealthy Russians and Britons but had lost. Cyprus has retained links with Britain since its days as a colony.
The head of the EU rescue fund said Cyprus should receive the first emergency funds in May.
The U.S. Treasury, noting the importance to the United States of financial stability in Europe, its largest trading partner, said it was now up to Cypriots to rebuild their economy: "It is critical to lay the foundation for a return to financial stability and growth in Cyprus," the Treasury said.
Analysts had said failure to clinch a deal could have caused a financial market sell-off, but some said the island's small size - it accounts for just 0.2 percent of the euro zone's economic output - would have limited contagion.
Cyprus's banking sector, with assets eight times the size of the economy, has been crippled by exposure to Greece, where private bondholders suffered a 75-percent "haircut" last year.
The tottering banks held 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros - enormous sums for an nation of 860,000 people that could never sustain such a big financial system on its own.