Cyprus becomes first ever euro-country to impose cash controls

For its part, the European Central Bank flew in extra supplies of bank notes to cope with an expected upsurge in withdrawals.

The temporary controls, which will see Cyprus operate a siege economy, are part of a desperate bid by the Cypriot government to avoid possible runs on its banks which have stayed closed for more than a week.

Finance minister Michalis Sarris said that Cypriot banks have already suffered from "substantial outflows" in recent weeks as nervous investors rushed to get money out.

Cypriots leaving the country will be allowed to take no more than €3,000 with them on each trip. There will also be a €10,000 cap on payments for tuition fees in foreign universities, alongside a €5,000 monthly limit on using credit and debit cards abroad.

All payments for imports of goods will be subject to approval by the government. Cypriots will also be required to declare all monies received for the sale of exports or property overseas.

The government also announced that the maximum daily withdrawal from ATM's would be increased to €300.

Cypriots have in recent days been unable to withdraw more than €100 per day from Laiki bank and €120 from the Bank of Cyprus, the country's two biggest lenders.

While Cyprus is by no means the first country in European history to impose capital controls, it is unusual to impose restrictions when you do not have your own currency.

The Cypriot government says that the controls will only be in place for seven days. But many analysts are sceptical, with many expecting the curbs to stay in place for months or even years.

Some point to the experience of Iceland, which imposed temporary capital controls in November 2008 after the collapse of its banking sector.

More than four years on, the controls are still in place and foreign investment into Iceland, which had helped drive the country's rapid economic growth in the decade leading up to the crash, is still 25 percent lower than in 2007.

Speaking to EUobserver on Wednesday, Carsten Brzeski, a senior economist at ING bank in Belgium, said that it is "very likely that the controls remain in place for at least a month, probably even longer."

There are also fears that the controls could plunge Cyprus deeper into recession.

According to the European Commission's latest economic forecast, published in February, the Cypriot economy is projected to stay in recession in 2013 and 2014, with a 3.5 percent contraction this year.

Its debt to GDP ratio is expected to touch 93 percent in 2013 and 97 percent in 2014. But keeping the capital controls in place for any significant length of time is likely to lead to a sharp decline in exports and foreign investments, making the numbers even worse.

"Since the economy is almost exclusively driven by financial services, the contraction should be much stronger. A contraction of 5-7 percent could be possible, obviously undermining debt sustainability and eventually requiring another bailout package or another discussion on possible debt restructuring," Brzeski added.

Meanwhile, the Cypriot parliament is yet to give its approval on the revised €10 billion bailout agreed by eurozone finance ministers in Brussels on Monday, creating more uncertainty.