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Cyprus bailout: Deal reached in Eurogroup talks

2013-03-25 05:21:25

Eurozone finance ministers have agreed a 10bn-euro bailout deal for Cyprus to

prevent its banking system collapsing and keep the country in the eurozone.

Laiki (Popular) Bank - the country's second-biggest - will be wound down and

deposit-holders with more than 100,000 euros ($130,000; 85,000) will face big

losses.

However, all deposits under 100,000 euros will be "fully guaranteed".

Officials warn the island faces a deep recession with many businesses to shut.

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Bondholders and those with deposits of more than 100,000 euros face significant

losses; perhaps 40% or more

image of Gavin Hewitt Gavin Hewitt Europe editor

The European Central Bank had set a deadline of Monday for the deal, which came

a week after the Cypriot parliament rejected a proposed bank levy on small and

large deposits.

The new deal will not be put to a vote in the Cyprus parliament.

IMF head Christine Lagarde said the bailout deal agreed was "a comprehensive

and credible plan" to help restore trust in the banking system.

Cypriot Finance Minister Michalis Sarris said he believed the possibility of

bankruptcy had been averted.

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There may be some relief that smaller savings no longer face a 6.7% levy, but

Cypriot citizens may over time end up feeling more than 6.7% poorer as a result

of this so-called bailout

image of Robert Peston Robert Peston Business editor

"It's not that we won a battle, but we really have avoided a disastrous exit

from the eurozone," he said.

There will be relief in Cyprus that small depositors have been protected, but

the deal comes at a heavy price, BBC correspondents say.

The chairman of the Cypriot parliament's finance committee, Nicholas

Papadopolous, said the agreement made "no economic sense".

"We are heading for a deep recession, high unemployment. They wanted to send a

message that the Cypriot economy ought to be destroyed, and they've succeeded

in a large part - they've destroyed our banking sector," he told the BBC.

EU Commissioner for Economic Affairs Olli Rehn conceded that the "depth of the

financial crisis in Cyprus means that the near future will be difficult for the

country and its people".

Protestors shout slogans against the EU at a protest outside a Eurogroup

meeting at the European Council building on March 24 Earlier proposed solutions

to the crisis sparked anger among ordinary Cypriots

Financial markets in Asia and Europe rose in early trading on news of the

agreement.

Cash cap

The deal came after hours of tense negotiations between Cypriot President Nicos

Anastasiades and the "troika" of EU, European Central Bank and IMF leaders.

Under the agreement all deposits of less than 100,000 euros will be secured.

Laiki will be split into "good" and "bad" banks, with its good assets

eventually merged into Bank of Cyprus.

The percentage to be levied on large deposits in the Bank of Cyprus - the

island's biggest lender - will be resolved in the coming weeks, the president

of the Eurogroup of eurozone finance ministers, Jeroen Dijsselbloem, told a

press conference overnight in Brussels.

Eurozone bailouts - graphic

Banks in Cyprus have been closed since last Monday and many businesses are only

taking payment in cash.

On Sunday, Bank of Cyprus further limited cash machine withdrawals to 120 euros

a day.

With queues growing outside cash machines across the island, Laiki also lowered

its daily limit to 100 euros, Cyprus News Agency reported.

The bank's previous limit had been 260 euros per day.

The details of the reopening of Cyprus' banks are to be discussed on Monday.

German pressure

A week ago, the Cypriot parliament rejected a planned bank levy that would have

taken 6.75% from small savers and 9.9% from larger investors. The proposal

caused widespread anger among ordinary savers.

In response, the European Central Bank (ECB) had said it would cut off funds to

Cyprus's banks by Monday unless a new deal was reached.

There is concern on the Mediterranean island that a levy on large-scale foreign

investors, many of whom are Russian, will damage its financial sector.

Correspondents say Germany has pushed hard for a levy on investors who have

benefited from high interest rates in recent years, rejecting a Cypriot plan to

use money from pension funds.

A Cypriot attempt to secure Russian help was unsuccessful.