Cyprus clinches last-ditch bailout deal

[NBCNews]

  Pavlos Vrionides / APA private security officer, center, guards a branch of a Bank of Cyprus after a small bomb attack at Polemidia a suburb of the southern port city of Limassol, Cyprus, early Monday, March 25, 2013. By Annika Breidthardt and Jan Strupczewski, ReutersBRUSSELS - Cyprus clinched a last-ditch deal with international  lenders on Monday for a 10 billion euro ($13 billion) bailout that will shut  down its second largest bank and inflict heavy losses on uninsured depositors,  including wealthy Russians.

The agreement emerged after fraught  negotiations between President Nicos Anastasiades and heads of the European  Union, the European Central Bank and the International Monetary Fund - hours  before a deadline to avert a collapse of the banking system.

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The plan, swiftly endorsed by euro zone finance ministers, will spare the east  Mediterranean island a financial meltdown by winding down Popular Bank of  Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the  Bank of Cyprus to create a "good bank".

Deposits above 100,000 euros,  which under EU law are not guaranteed, will be frozen and used to resolve debts,  and Laiki will effectively be shuttered, with thousands of job losses.  

An EU spokesman said no levy would be imposed on any deposits in Cypriot  banks. A first attempt at a deal last week collapsed when the Cypriot parliament  rejected a proposed levy on all deposits.

A senior source involved in  the talks said Anastasiades had threatened to resign at one stage if he was  pushed too far.

EU diplomats said the president, flown to Brussels in a  private jet chartered by the European Commission, had fought to preserve the  country's business model as an offshore financial centre drawing huge sums from  wealthy Russians and Britons.

The key issues in dispute were how Cyprus  would raise 5.8 billion euros from its banking sector towards its own financial  rescue, and how to restructure and resolve the outsized banks.

The EU's  economic affairs chief Olli Rehn said there were no good options but "only hard  choices left" for the latest casualty of the euro zone crisis.

With  banks closed for the last week, the Central Bank of Cyprus imposed a 100-euros  per day limit on withdrawals from cash machines at the two biggest banks to  avert a run.

French Finance Minister Pierre Moscovici rejected charges  that the EU had brought Cypriots to their knees, saying it was the island's  offshore business model that had failed.

"To all those who say that we  are strangling an entire people ... Cyprus is a casino economy that was on the  brink of bankruptcy," he told Canal Plus television.

The euro gained  against the dollar on the news in early Asian trading.

Analysts had said  failure to clinch a deal could cause a financial market selloff, but some said  the island's small size - it accounts for just 0.2 percent of the euro zone's  economic output - meant contagion would be limited.

The abandoned levy  on bank deposits had unsettled investors since it represented an unprecedented  step in Europe's handling of a debt crisis that has spread from Greece, to  Ireland, Portugal, Spain and Italy.

ANXIOUS MOOD

In the Cypriot  capital, Nicosia, on Sunday the mood was anxious.

"I haven't felt so  uncertain about the future since I was 13 and Cyprus was invaded," said Dora  Giorgali, 53, a nursery teacher who lost her job two years ago when the school  she worked at closed down.

"I have two children studying abroad and I  tell them not to return to Cyprus. Imagine a mother saying that," she said in a  central Nicosia square. "I think a solution will be found tonight but it won't  be in the best interests of our country."

Cyprus's banking sector, with  assets eight times the size of its economy, has been crippled by exposure to  Greece, where private bondholders suffered a 75 percent "haircut" last year.  

Without a deal by the end of Monday, the ECB said it would cut off  emergency funds to the banks, spelling certain collapse and potentially pushing  the country out of the euro.

Conservative leader Anastasiades, barely a  month in office and wrestling with Cyprus' worst crisis since a 1974 invasion by  Turkish forces split the island in two, was forced to back down on his efforts  to shield big account holders.

Anticipating a run when banks reopen on  Tuesday, parliament has given the government powers to impose capital controls.  

PARLIAMENT

About 200 bank employees protested outside the  presidential palace on Sunday chanting "troika out of Cyprus" and "Cyprus will  not become a protectorate".

In a stunning vote on Tuesday, the 56-seat  parliament rejected a levy on depositors, big and small. Finance Minister  Michael Sarris then spent three fruitless days in Moscow trying to win help from  Russia, whose citizens and companies have billions of euros at stake in Cypriot  banks.

On Friday, lawmakers voted to nationalize pension funds and split  failing lenders into good and bad banks - the measure likely to be applied to  Laiki. The plan to tap pension funds was shelved due to German opposition, a  Cypriot official said.

The revised bailout plan many not require further  parliamentary approval since the idea of a levy was dropped.

The  tottering banks hold 68 billion euros in deposits, including 38 billion in  accounts of more than 100,000 euros - enormous sums for an island of 1.1 million  people which could never sustain such a big financial system on its own.

 

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