Eurozone finance ministers have reached a political agreement on an emergency lending programme for Cyprus which would help bring down the public debt-to-GDP ratio of the island to 100 percent in 2020, the chairman of the ministers has said.
Jeroen Dijsselbloem told a news conference after 10 hours of talks between the ministers and the International Monetary Fund that lasted into Saturday morning, that the single currency area would welcome an IMF contribution to the bailout that will total $13bn.
"The Eurogroup was able to reach a political agreement with the Cypriot authorities on the cornerstones of this agreement," Dijsselbloem said.
In return for the rescue loans, Cyprus will trim its deficit, shrink its troubled banking sector, raise taxes and privatise state assets, said Dijsselbloem.
"The assistance is warranted to safeguard financial stability in Cyprus and the eurozone as a whole,'' he told reporters.
Michael Sarris, Cypriot finance minister, said "I wish I was not the minister to do this ... Much more money could have been lost in a bankruptcy of the banking system or indeed of the country," adding that he hoped it would mark a new start for Cyprus.
While the bailout for the east Mediterranean island nation is many times smaller than Greece's or Ireland's, it is still considered crucial to the eurozone's future because a default even by a small country could cause uncertainty in financial markets and undermine investor confidence in other eurozone nations.
To reduce the amount of bailout loans Cyprus needs to keep its government afloat and recapitalise its banks, the ministers agreed to make sizeable Greek operations of the country's two largest banks, Bank of Cyprus and Laiki, eligible for spare rescue cash from Greece's bailout accord.
To raise enough new revenues, some creditors were also pushing Cyprus to accept a one-time levy of 10 percent on people with more than $130,600 in their Cypriot bank account. The levy will come into force on Tuesday, after a bank holiday on Monday. Cyprus will take immediate steps to prevent electronic money transfers over the weekend.
Eurozone ministers forced Cyprus' savers, almost half of whom are believed to be non-resident Russians, to pay up to 10 percent of their deposits to raise almost $6bn euros.
Cyprus also agreed to increase its corporate tax rate by 2.5 percentage points to 12.5 percent.
A swift deal
The economy of Cyprus, a Mediterranean island of almost one million people, represents less than 0.2 percent of the eurozone's annual economic output.
Cyprus, which first applied for a bailout last summer, was not in imminent danger of bankruptcy, as it faces its next bond redemption in June.
Even so, the European Central Bank, concerned that prolonged uncertainty over Cyprus could hurt market sentiment across the eurozone, has pushed for a swift deal, even threatening to cut the country's financial system off from emergency funding.
Dijsselbloem said that under the programme, the island's debt would fall to 100 percent of economic output by 2020.