BRUSSELS – Tense negotiations between Cyprus and its international creditors yielded a preliminary agreement early Monday that paves the way for the cash-strapped island nation to receive a $13 billion bailout, a diplomat said.
The agreement between Cyprus, the International Monetary Fund and the European Commission still needs approval by the 17-nation eurozone’s finance ministers, who were also meeting in the same building in Brussels.
Without a deal by Monday night, the tiny Mediterranean island nation of about 1 million would face the prospect of bankruptcy, which could force it to abandon the euro currency and spur turmoil in the eurozone of 300 million people.
Under the last-ditch agreement, Cyprus’ second-largest bank, Laiki, will be restructured and holders of bank deposits of more than 100,000 euros will have to take losses. It was not immediately clear whether the holders of large deposits in the remaining Cypriot banks would also be forced to take losses.
The diplomat, who spoke on condition of anonymity pending the official announcement, did not elaborate on how much large deposit holders would lose. Making them take a hit is expected to net several billion euros, thus reducing the amount of rescue loans the country needs.
To secure a rescue loan package, Nicosia had to find ways to raise 5.8 billion euros so it could qualify for the 10 billion euro bailout package. The bulk of that money is now being raised by forcing losses on large deposit holders as well as bond holders in Laiki bank, which will be split into a bad bank of toxic assets and a remaining viable core business.
But Cyprus resisted pressure by creditors to also unwind the country’s largest lender, Bank of Cyprus, the diplomat said.
In Cyprus, Parliament President Yiannakis Omirou confirmed that a preliminary agreement had been reached after about 10 hours of negotiations in Brussels. He couldn’t provide details but stressed the agreement “doesn’t involve the resolution of the Bank of Cyprus.”
The European Central Bank had threatened to stop providing emergency funding to Cyprus’ banks as of Tuesday if there were no agreement on how to raise the 5.8 billion euros.
A plan agreed to in marathon negotiations earlier this month called for a one-time levy on all bank depositors in Cypriot banks. But the proposal ignited fierce anger among Cypriots because it also targeted small savers. It failed to win a single vote in the Cypriot Parliament.
Under the new agreement, average savers’ deposits with all Cypriot banks of up to 100,000 euros will be guaranteed by the state in accordance with the EU’s deposit insurance guarantee, the diplomat said.
In an illustration of the depth of the fear of a banking collapse, Cyprus’ central bank on Sunday imposed a daily withdrawal limit of $130 from ATMs of the country’s two largest banks to prevent a bank run by depositors worried about their savings.
Cypriot banks have been closed this past week while officials worked on a rescue plan, and they are not due to reopen until Tuesday. Cash has been available through ATMs, but long lines formed and many machines have quickly run out of cash.
The international creditors, led by the IMF, were seeking a fundamental restructuring of the outsized financial system, which is worth up to eight times the country’s gross domestic product of about 18 billion euros. They say the country’s business model of attracting foreign investors, among them many Russians, with low taxes and lax financial regulation has backfired and must be upended.
They also insisted that Cyprus couldn’t receive more loans because that would make its debt burden unsustainably high.
Once the eurozone’s finance ministers sign off on a bailout deal, the ECB is expected to continue providing liquidity to the Cypriot banks, avoiding an imminent collapse. Several national parliaments in eurozone countries such as Germany then must also approve the bailout deal, which might take another few weeks.
Associated Press writers Elena Becatoros and Menelaos Hadjicostis in Nicosia, Cyprus, contributed to this story.
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