Tense negotiations between Cyprus and its international creditors yielded a preliminary agreement early today that paves the way for the cash-strapped island nation to receive a 10 billion euro ($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 meeting in the same building in Brussels.
Without a deal by tonight, 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.