Cyprus secures $13 bn bailout from eurozone, IMF

BRUSSELS (AP) — Cash-strapped Cyprus secured a €10 billion ($13 billion) bailout package from its European partners and the International Monetary Fund in a bid to prevent the island nation from entering a bankruptcy that could rekindle the region's debt crisis, officials said early Saturday.

In a major departure from established policies, the package also foresees a one-time levy on the money held in bank accounts in Cyprus. Analysts have warned that making depositors take a hit threatens to undermine investors' confidence in other weaker eurozone economies and might possibly lead to bank runs.

In return for the rescue loans, Cyprus will trim its deficit, shrink its troubled banking sector, raise taxes and privatize state assets, said the Netherlands' Jeroen Dijsselbloem, president of the Eurogroup meetings of the 17-nation eurozone's finance ministers.

"The assistance is warranted to safeguard financial stability in Cyprus and the eurozone as a whole," he said, briefing reporters after almost 10 hours of negotiations.

People with less than €100,000 in their Cypriot bank accounts will have to pay a one-time tax of 6.75 percent, those owning more money will lose 9.9 percent. The measure is expected to net €5.8 billion in additional revenues, Dijsselbloem added, thereby greatly reducing the country's financing need.

"We found it justified in terms of burden sharing to also involve the depositors," said Dijsselbloem, noting that it was a "unique measure" because of Cyprus' outsized banking system.

"As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders," Dijsselbloem added.

But the measure risks to scare investors in Europe's weaker economies, which could lead them to move their deposits to more stable eurozone countries like Germany. In that case, banks in southern Europe's economies might be considerably weakened and possibly require new bailouts. That could then weaken the respective governments, which might then need further assistance from their eurozone partners, possibly setting off a vicious spiral.

Joerg Asmussen, a member of the European Central Bank's governing council, sought to dismiss fears of bank troubles stemming from the levy, saying the central bank stands ready to provide financial institutions with emergency liquidity assistance.

"The levy, it's an appropriate tool. It's really tailor-made to the situation in Cyprus," he said. "It's a country in extreme financing need, and what you do is to expand the tax base, not only to residents but also to non-residents," he said.

Russian citizens are estimated to have at least €20 billion in deposits in Cyprus.

Asmussen stressed that there is no risk of such a levy being implemented in other countries that have already received bailouts, such as Greece, Ireland or Portugal because those countries' financing needs are covered by their international rescue loans.

In a sign of how exceptional and urgent a decision the one-time levy is, Cypriot banks are already implementing measures to make sure that depositors cannot withdraw money to shrink the tax basis, Asmussen said. The remainder of their holdings can be freely withdrawn, he added.

Cypriot lawmakers are expected to decide a law on the bank levy over the weekend, and the money will be levied early next week, Asmussen added.

Russia was also expected to significantly extend the maturity of a €2.5 billion loan granted in 2011, the officials said.

While the bailout for the east Mediterranean island nation is many times smaller than Greece's or Ireland's, it was still considered crucial to the eurozone's future because a default even by a small country could roil 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 recapitalize its banks, the country also agreed to raise its corporate tax by a quarter, up from 10 to 25 percent, Dijsselbloem said. The ministers also 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.

The economy of Cyprus, an eastern Mediterranean island of almost a million people, represents less than 0.2 percent of the eurozone's annual economic output.

Cyprus, which first applied for a bailout last summer, wasn't in imminent danger of bankruptcy, as it faces its next bond redemption in June. But the European Central Bank, concerned that prolonged uncertainty over Cyprus could hurt market sentiment across the eurozone, had pushed for a swift deal, even threatening to cut the country's financial system off from emergency funding.

The finance ministers' agreement still has to be approved by parliaments in several eurozone nations, though EU officials say everything should be done by the end of the month.

To appease its potential rescue creditors, Cyprus has already accepted an independent audit of its banks, which hold billions in Russian deposits, to soothe concerns voiced by Germany, France and others that they launder dirty Russian money.