Cyprus on Monday hammered out a new bailout deal
with its international creditors, casting aside a despised bank
depositor tax in favour of forced losses on large players in its two
The agreement came hours before the European Central Bank had been expected to cut off emergency funding to the Cypriot banking sector in the absence of a deal.
"I'm happy because we shall have a [bailout] programme and that it is to the best interests of the Cyprus people and the European Union as a whole," said Cypriot President Nicos Anastasiades, who thrashed out the agreement after more than 10 hours of talks in Brussels.
Eurozone finance ministers, who had also gathered in the Belgian capital, then promptly gave their blessing to the bailout while the chief of the International Monetary Fund (IMF) said she would recommend her institution participate financially too.
"I believe we have averted literally the possibility of bankruptcy and we have ensured the prospects of generations to come," Cypriot Finance Minister Michael Sarris said. "It's a good night for Cyprus and the eurozone."
"We've put an end to the uncertainty that has affected Cyprus and the euro area over the last few days," said the president of the ministers' Eurogroup panel, Jeroen Dijsselbloem. "I'm convinced that this solution is better than the one we reached last week."
The Cypriot parliament rejected that agreement amid widespread anger in the Mediterranean island nation over a provision that bank depositors big and small would have to contribute through a one-time tax.
The levy was meant to make up the difference between the 10-billion-euro (13-billion-dollar) bailout and the needs of Cyprus for shoring up its troubled banking sector and struggling economy, estimated at about 17 billion euros.
Instead, the rescue package now foresees that losses would be forced on holders of shares, bonds and deposits above 100,000 euros in the country's largest and second-largest banks.
The latter, Laiki Bank, is to be wound down "immediately" and split into a "good bank" with viable assets and a "bad bank" with assets to be run down, the Eurogroup said.
The good bank would be incorporated into the larger lender, the Bank of Cyprus, which would have to assume not only Laiki's healthy assets but also its about 9 billion euros in European Central Bank emergency loans, a measure that Anastasiades was said to have vigorously opposed.
Shareholders, bondholders and depositors in Laiki would take the biggest hit but it was also "inevitable" that those in the Bank of Cyprus will be affected too as part of the lender's recapitalization, Dijsselbloem said.
He said the approach had been considered before but had not proven politically acceptable until the situation in the Cypriot banking sector "deteriorated fast" over the past week.
The island's banks have foundered with their heavy exposure to Greek debt, and the extent of their losses still has to be determined, Dijsselbloem said.
According to Dijsselbloem, the losses to be forced upon high-end Laiki depositors, termed a bail-in, would be worth 4.2 billion euros alone. Big depositors in Cyprus include many major companies and foreign investors, notably from Russia.
"It would be unrealistic to claim that we will not sustain substantial losses," Cypriot Finance Minister Michalis Sarris said in Brussels.
The measures do not have to be approved by the Cypriot parliament because it has already passed relevant laws, but the parliaments in Finland, Germany and the Netherlands have to endorse the deal, Dijsselbloem said.
He said he expected the measures to pave the way for the European Central Bank to continuing providing life-saving emergency funding to the Bank of Cyprus and expressed hope that Russia would also offer Cyprus some relief on loans granted by Moscow.
The bailout should also allow for a first tranche of aid to be disbursed to Cyprus "in early May," said Klaus Regling, the chief of the eurozone's rescue fund.
"The near future will be very difficult for the country and its people," EU Economy Commissioner Olli Rehn said. "Cyprus is part of the European family, and Europe will stand by the Cypriot people."
The overnight negotiations nevertheless proved "very tough," European sources said with Cypriot media reporting that Anastasiades had at one point threatened to resign.
"We definitely lost some time," German Finance Minister Wolfgang Schaeuble said. "... That is bitter, also for Cyprus. But without a bail-in for both banks, it would not have worked."
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