BRUSSELS — Cash-strapped Cyprus secured a (EURO)10 billion ($13 billion) bailout package from its European partners and the International Monetary Fund in a bid to keep the island nation from a bankruptcy that could rekindle the region's debt crisis, officials said early Saturday.
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.
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 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 (EURO)100,000 in their Cypriot bank account. Analysts have warned making depositors breaks a taboo, undermining investors' confidence in other weaker eurozone economies and possibly leading to bank runs.
Dijsselbloem said Cyprus' outsized banking sector requires "unique measures" but he did not immediately comment whether such a one-time levy had been agreed on.
If investors were to move their large deposits to more stable eurozone countries like Germany, banks in southern Europe's economies might be considerably weakened and possibly require new bailouts.
The economy of Cyprus, a Mediterranean island of almost a million people, represents less than 0.2 percent of the eurozone's annual economic output. But even the most reluctant EU partners, such as Germany, have accepted it would be better to bail Cyprus out than to let it go bankrupt, which could rekindle the bloc's three-year-old debt crisis.
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, has 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.
Juergen Baetz can be reached on Twitter at HYPERLINK " http://www.twitter.com.jbaetz"