Cyprus has received a $13bn bailout after lengthy talks in Brussels with eurozone leaders and the International Monetary Fund. The conditions attached to the deal, however, have led to a run on the country's banks.
Savers reacted with shock on Saturday after the government agreed to an unprecedented levy on all deposits in return for the EU bailout.
The debt rescue package, agreed with the eurozone and the IMF early in the morning after around 10 hours of talks in the Belgian capital, is significantly less than the $22bn Cyprus had initially sought.
Most of the balance is to be made up through the bank deposit levy of up to 9.9 percent, which will apply to everyone from pensioners to Russian oligarchs and tens of thousands of British expatriates, and is hoped to raise $7.6bn.
Cyprus - which accounts for just 0.2 percent of the combined eurozone economy - is the fifth country to secure a debt rescue package from its eurozone partners in the three-year debt crisis.
The Cyprus government had held out against the unprecedented EU bailout condition until the eleventh hour, arguing that it would risk a run not only on the island's own banks but also on those of other debt-ridden eurozone economies.
Although the deal was reached too late for Cyprus newspapers, the government U-turn prompted a flood of angry comments on the internet, and some savers queued up at ATM machines in a desperate bid to withdraw their savings.
|Follow our comprehensive Euro Crisis spotlight coverage
Christos Stylianides, a government spokesman, tried to calm public anger, saying: "The situation is serious but not tragic, there is no reason to panic."
"Either we could choose the catastrophic scenario of a disorderly default or a painful but controlled management of the crisis that definitively ends the uncertainty and provides a starting point to kick-start the economy," said President Nicos Anastasiades.
The levy will see deposits of more than $130,000 hit with a 9.9 percent charge when lenders reopen their doors after a scheduled public holiday on Monday.
Under that threshold and the levy drops to 6.75 percent.
At the same time, an additional "withholding tax" will be imposed on interest on bank deposits, and Cyprus will have to raise corporate tax to 12.5 percent from 10 percent and sell off state assets so as to help balance the public finances.
Ministers were in a race against the clock to thrash out draft legislation ratifying the bailout and push it through parliament before the banks reopen on Tuesday.
"My initial reaction is one of shock," said Nicholas Papadopoulos, head of parliament's financial affairs committee. "This decision is much worse than what we expected and contrary to what the government was assuring us, right up until last
night," he told Reuters, without saying whether he would back the measure or whether he thought it would pass.
Christine Lagarde, the International Monetary Fund's chief, who attended the Brussels meeting, said she backed the
deal and would ask the IMF board in Washington to contribute.
"We believe the proposal is sustainable for the Cyprus economy," she said. "The IMF is considering proposing a contribution to the financing of the package ... The exact amount is not yet specified."
MPs are to convene on Sunday for the emergency debate, Antonis Koutalianos of the speaker's office, told the AFP news agency.
Papadopoulos, a centre-right MP and the son of a former president, told state radio the agreement was a "disaster" for the Cyprus banking system, which is nearly eight times the size of the island's economy.
"Before, I thought any decision would be bad for Cyprus but this is a nightmare," Papadopoulos said.
The price tag is very small compared with two rescues for Greece worth about $496bn, Ireland's $111bn , Portugal's $102bn and $54bn for Spanish banks.
"It's something that compared to other possible outcomes, is the least onerous," Michalis Sarris, Cyprus's finance minister, said, adding the arrangement meant his government "avoided salary and pension cuts" for the public sector.
The planned levy raised concerns among analysts over a possible bank run in bigger eurozone economies, where fragile public finances are also under scrutiny.