Cyprus is to receive a €10 billion (£8.7 billion) bail-out from the eurozone to recapitalise its ailing banking system in return for a series of drastic measures which will hit the country’s savers.
The Mediterranean island nation becomes the fifth country to turn to the eurozone, following in the footsteps of Ireland, Greece, Portugal and Spain.
The emergency funding will be used to prop up the country’s banks which were hit by the financial restructuring of nearby Greece.
The Cypriot banking system had grown to be eight times the size of the country’s fledgling economy – which accounts for just 0.2pc of the eurozone’s gross domestic product.
But in a departure from previous bail-outs, the country’s savers are being asked to make sacrifices.
The terms of the deal mean that Cyprus’s savers will sacrifice up to 10pc of their deposits in a move which will raise as much as €6 billion.
The move, which is likely to prove unpopular with the country’s 1m citizens – and the Russian non-residents who reportedly account for half of deposits in Cyprus’s banks – will be enacted almost immediately.
Following a bank holiday in the country on Monday, March 18, the levy on bank deposits will come into force on Tuesday, March 19.
The Cypriot government will take steps to prevent electronic money transfers over the weekend, in order to stop depositors attempting to avoid the curbs.
“As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders,” said Jeroen Dijsselbloem, the Dutch finance minister who chaired the meeting at which the bail-out was agreed in Brussels.
“We are not penalising Cyprus… we are dealing with the problems in Cyprus,” he continued.
Christine Lagarde, managing director of the International Monetary Fund (IMF), attended the meeting: “I welcome the agreement reached today to address Cyprus’ economic challenges. The IMF has always said that we would support a solution that is sustainable, that is fully financed, and that appropriately allocates the burden sharing.”
On returning to Washington, she said she would ask the IMF’s board to contribute to the bail-out package.
It is thought the IMF’s participation will come from existing funds, and therefore not require additional financing from member countries, such as the UK.
The €10 billion falls short of the €17 billion the Cypriot government estimated it required to stabilise its banking system.
However the eurozone finance ministers are understood to have felt such a level of debt would be too risky, given €17 billion is almost the size of the country’s annual GDP.
In addition to the raid on savers, the Cypriot government has also agreed to increase its corporation tax rate by 2.5 percentage points to 12.5pc in order to raise revenues.
Michael Sarris, the Cypriot finance minister, is due to fly to Moscow to negotiate an extension to an existing €2.5 billion loan from the Russian government.
He hopes to extend the term by five years, to 2021, and reduce the amount of interest payable.
Olli Rehn, European Commissioner for Economic and Monetary Affairs, said that he believed the Russian government is ready to make a contribution.
At the same meeting, eurozone finance ministers agreed to extend the maturity of existing loans to Portugal and Ireland, but the terms of the extensions were not made public.