AFTER the protests and banners of March, when a proposed bail-out threatened losses on insured depositors, Nicosia is strangely calm (and wet). Some restaurants in and around the Cypriot capital are busy, others are deserted. But under the veneer of normality, the shock of that first, jettisoned bail-out and the bruising terms of the eventual deal are taking their toll. With access to bank accounts still restricted and capital controls in place, Cypriots are hoarding money. Trade credit has dried up, choking business activity.

New-car sales plunged by 59% in the year to March. Sunseekers tend to shun crisis-stricken countries: the number of tourists in the first quarter was 10% down on the same period of 2012. And this is just the beginning. An economy already in recession—GDP fell by 2.4% last year—is about to nosedive, undermining the assumptions on which the bail-out was based.

The longer that capital controls last, the greater the damage will be. The pre-crisis contributions of business services and financial services to output were similar (7.4% and 9.2% respectively). Whatever happens the banks must shrink, drastically. But Cyprus may yet be able to retain its appeal as a business hub in the eastern Mediterranean, providing legal and accountancy services from a qualified workforce. That hope will be dashed, however, if capital controls become entrenched, says Alexander Apostolides, an economist at European University Cyprus.

The central bank has already relaxed some domestic-banking restrictions. The cash limit on withdrawals remains €300 ($390) a day, but use of standing orders and direct debits has been restored. Electronic transfers of capital remain blocked. Far more important are still-stringent external controls. Cypriots cannot, for example, take more than €2,000 in cash when they leave the island.

Such controls can be lifted only when the banks at the heart of the crisis have been restructured. That is crucial for restoring confidence and averting a flight of money once it can move. The aim is to bury Laiki, the country’s second-biggest bank, and to resurrect Bank of Cyprus (BOC), its largest. But the process is complex and vulnerable to delay.

When the final rescue deal was announced on March 25th, Laiki was to be split into a “good” and a “bad” bank. The bad bank’s losses would be absorbed by shareholders, bondholders and uninsured depositors (the latter providing the biggest pot of money, worth an estimated €4.4 billion). That split is occurring. The assets and liabilities of the good bank, including Laiki’s insured deposits, have been moved to BoC. But instead of the bad bank retaining non-performing loans (where borrowers are behind on payments), all Laiki’s domestic loans are going to BoC, net of expected losses. That leaves BoC exposed if such loans turn out even worse.

BoC, for its part, is supposed to recapitalise itself from its €10 billion-worth of uninsured deposits, by converting a chunk of them into equity. When the revised bail-out was announced, it was hoped that the forced conversion might affect only 37.5% of these deposits. But it now looks as if 60% of uninsured deposits will be required to recapitalise BoC.

That’s because the harsh treatment meted out to Cyprus has inflicted huge damage. Before the bungled bail-out, a worst-case scenario envisaged the two big banks requiring €7.8 billion in recapitalisation; now €10.6 billion may be needed to clear up the mess, according to a leaked European Commission document. Some of the big BoC deposits, such as those held by local authorities and state schools, will be safeguarded, but others will not be so lucky. The central bank said this week that insurers, charities and private schools would incur losses of 27.5%.

Whatever the eventual scale of its recapitalisation, the credibility of the restructured BoC will still be shaky since it will be so heavily exposed to an economy laden with debt. Private debt of households and firms in Cyprus is close to 300% of GDP, the third-highest in the EU. Bad loans are set to soar as unemployment, currently 14%, rises and as property values sink.