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Why It's Important to Keep Cypriot Banks Shut

Cypriots line up at a Laiki Bank ATM to withdraw their money.
Katie Slaman | CNBC
Cypriots line up at a Laiki Bank ATM to withdraw their money.

The decision to further push back the re-opening of Cypriot banks, which have been shut since March 16, even as the country hammered out a last-minute bailout deal, may be seen as a signal of further uncertainty in the crisis-hit island nation. But analysts tell CNBC that on the contrary, the move will help restore investor confidence.

The extension of the banks closure to Thursday, to prevent a run on deposits, shows that the authorities are working hard to put in place measures to stabilize the battered banking system, said experts.

"People who have got money with these banks will want them to re-open, but it's much more important in terms of global financial stability for it to be done the right way," said Steve Brice, chief investment strategist at Standard Chartered Bank in Singapore.

The postponement comes on the heels of a 10 billion euro ($13 billion) bailout for the Cypriot banking sector in lieu of heavy losses for large depositors. Even when the banks re-open, they are expected to be subject to capital controls.

(Read More: All Cyprus Banks to Remain Closed Until Thursday)

Brice added that government bond yields in peripheral euro zone states like Spain and Italy had not risen sharply, which was a sign that investors viewed any fallout from Cyprus as contained.

"Markets were down a bit yesterday [Monday], but bonds in the peripheral euro zone were not up that significantly and I think ultimately this [keeping the banks closed] will be seen as a positive," Brice said. "But we do need to get through the next few days."

The decision to close Cypriot banks 11 days ago, after the terms of an initial bailout agreement included a levy on small and large deposits, caused ripples within and outside Cyprus.

"The Cypriot banks have been closed since the 16th, so this is really getting a little bit long in the tooth," Ed Ponsi, managing director, Barchetta Capital Management in New York told CNBC's "Asia Squawk Box."

"It's just another sign that Dijsselbloem and the European ministers are not ready for prime time," he said, referring to Dutch Finance Minister and head of the Eurogroup Jeroen Dijsselbloem. Overnight comments from Dijsselbloem that the new normal in Europe will be that regulators look to a bank's own customers to help with any bank bailout rattled global markets, even though the remarks were later modified.

(Read More: Markets Jarred by Mixed Message From Europe)

Right Move? Tim Condon, head of research, Asia, at ING Financial Markets said it was important to keep the Cypriot banks closed so that the authorities could work out the implications of Monday's bailout deal.

Under the new terms, a levy will be imposed on uninsured deposits over 100,000 euros at the Popular Bank of Cyprus, the country's second biggest bank, which will be wound down.

(Read More: When Cyprus Banks Reopen, It Might Not Well)

"It is obviously complicated to work out the details of the agreement and to get a sense of how much money is at risk and to assess what the flows are going to look like. These things take time," he said.

"There will be withdrawals when the banks re-open and they are preparing for that, but I wouldn't make a panic run on the banks my baseline scenario," said Condon, talking about whether Cypriot banks were likely to face a sudden and sharp withdrawal of deposits.

- By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC

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