BRUSSELS - Cyprus secured a 10 billion-euro ($13 billion) package of rescue loans in tense, last-ditch negotiations early today, saving the country from a banking system collapse and bankruptcy.
"We've put an end to the uncertainty that has affected Cyprus and the euro area over the past week," said Jeroen Dijsselbloem, who chairs the meetings of the 17-nation eurozone's finance ministers.
In return for the bailout, Cyprus must drastically shrink its outsized banking sector, cut its budget, implement structural reforms and privatize state assets, he said.
The cash-strapped Mediterranean island nation has been shut out of international markets for almost two years. It needs the bailout to recapitalize its ailing lenders and keep the government afloat. The European Central Bank had threatened to cut crucial emergency assistance to the country's banks by Tuesday without an agreement.
Without a deal by tonight, the tiny Mediterranean island nation of about 1 million would have faced the prospect of bankruptcy, which could have forced it to become the first country to abandon the euro currency. That precedent would have roiled markets and spurred turmoil across the entire eurozone of 300 million people, analysts said.
The finance ministers accepted the plan reached in 10 hours of negotiations in Brussels between Cypriot officials and the so-called troika of creditors: the International Monetary Fund, the European Commission and the European Central Bank.
"We believe that this will form a lasting, durable and fully financed solution," said IMF chief Christine Lagarde.
Under the plan, Cyprus' second-largest bank, Laiki, will be restructured and holders of bank deposits of more than 100,000 euros will have to take losses, Dijsselbloem said, adding that it was not yet clear how severe the losses would be.
"This will have to be worked out in the coming weeks," he added, noting that it is expected to yield 4.2 billion euros overall. Analysts have estimated investors might lose up to 40 percent of their money.
Savers' deposits with all Cypriot banks of up to 100,000 euros will be guaranteed by the state in accordance with the EU's deposit insurance guarantee, Dijsselbloem said. Laiki will be dissolved immediately into a "bad bank" containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation's biggest lender, Bank of Cyprus.
Large deposits with Bank of Cyprus above the insured level will be frozen until it becomes clear whether or to what extent they will also be forced to take losses, Eurogroup finance ministers said in a statement.
Dijsselbloem defended the creditors' approach to make deposit holders take heavy losses, saying the measures "will be concentrated where the problems are, in the large banks."