Brussels: Eurozone ministers struck a deal yesterday to hand Cyprus a bailout worth €10 billion ($13 billion) to stave off bankruptcy, in return for promises of tax rises from Nicosia.
Cyprus is the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help in the wake of the sovereign debt crisis that started in 2010.
After 10 hours of talks through the night, finance ministers from the currency bloc agreed to a package, smaller than initially expected, mainly needed to recapitalise the Mediterranean island's banks which were hit hard by a sovereign debt restructuring in Greece last year.
"The Eurogroup was able to reach a political agreement with the Cypriot authorities on the cornerstones of this agreement," Dutch finance minister Jeroen Dijsselbloem, who chairs the finance ministers' group, told reporters. "Financial assistance to Cyprus is warranted to safeguard financial stability to the island and to the eurozone as a whole."
Under the emergency lending programme, Cyprus agreed to increase its nominal corporate tax rate by 2.5 percentage points to 12.5 per cent, a senior eurozone official said.
Nicosia will also impose a 9.9 per cent one-off levy on deposits above €100,000 in Cypriot banks and a tax of 6.75 per cent on smaller deposits. There will also be a tax on interest that the deposits generate, the official said.
Separately, eurozone ministers agreed to extend the maturity of emergency loans to Ireland and Portugal to smooth out their return to market financing this year and next. The tax measures will boost Cypriot revenues, limiting the size of the loan needed from the euro zone, in order to keep public debt at a level that will be possible to service.
Dijsselbloem said that under the programme, the island's debt would fall to 100 per cent of GDP by 2020. He said the eurozone would welcome a contribution to the bailout from the International Monetary Fund.
IMF chief Christine Lagarde, who attended the Brussels meeting, said the Fund was considering its position. It has played a key part in previous eurozone bailouts. "We believe the proposal is sustainable for the Cyprus economy, it is fully financed," she said. "The IMF is considering proposing a contribution to the financing of the this package ... The exact amount is not yet specified."
Cyprus, with gross domestic product of barely 0.2 per cent of the bloc's overall output, applied for financial aid last June, but negotiations were stalled by presidential elections in February.
Without emergency lending, Cyprus will default and threaten to dent the return of investor confidence in eurozone public finances fostered by the European Central Bank's (ECB) promise to do whatever it takes to shore up the currency bloc.
Russia is likely to help finance the programme by extending a €2.5 billion loan already made to Cyprus by five years to 2021 and reducing the interest rate, which is now at 4.5 per cent, EU Economic and Monetary Affairs Commissioner Olli Rehn said.
Cypriot finance minister michael Sarris will travel to Moscow for meetings tomorrow.