Cyprus and Europe Officials Agree on Outlines of a Bailout

The deal, struck after hours of meetings here, was approved by the finance ministers from the euro zone, the 17 countries that use the common currency. It would drastically prune the size of Cyprus’s oversize banking sector, bloated by billions of dollars from Russia and elsewhere in the former Soviet Union.

The deal would scrap the highly controversial idea of a tax on bank deposits, although it would still require forced losses for depositors and bondholders.

“We have a deal,” President Nicos Anastasiades was quoted as saying by Greek media. “It is in the interests of the Cypriot people and the European Union.”

The head of the finance ministers, Jeroen Dijsselbloem of the Netherlands, said the agreement could “be implemented without delay” without a new vote by the Cypriot Parliament, which had rejected a deal last week. Lawmakers on Friday passed legislation that set the framework for the new action, he said.

“This has indeed been an arduous week for Cyprus,” he said.

He did not have exact timing for when Cyprus’s banks, which have been closed for more than a week, would reopen. Cyprus would receive the first payment of the bailout package worth 10 billion euros, or $13 billion, in early May.

Under the agreement, Laiki Bank, one of Cyprus’s largest, would be wound down and senior bondholders would take losses.

Depositors in the bank with accounts holding more than 100,000 euros would also be heavily penalized but the exact amount of those losses would need to be determined.

The plan to resolve Laiki Bank should allow the Bank of Cyprus, the country’s largest lender, to survive. But the Bank of Cyprus will take on some of Laiki’s liabilities in the form of emergency liquidity, which has been drip-fed to Laiki by the European Central Bank. That short-term financing, which the E.C.B. had threatened to cut off on Monday, will most likely continue.

Depositors in the Bank of Cyprus are likely to face forced losses rather than any form of tax. That plan, which set off outrage last week in Cyprus and as far away as Moscow, has now been dropped entirely.

Mr. Dijsselbloem said he was “convinced this is a much better deal” because under the revised agreement, the heaviest losses “will be concentrated where the problems are, in the large banks.”

These provisions should help reverse what, in recent days, has been Cyprus’s steady retreat into a surreal pre-modern economy dominated by cash.

Retailers, gas stations and supermarkets, gripped by uncertainty over whether Cyprus would really secure a 10 billion-euro financial lifeline, have increasingly refused to take credit cards and checks.

“It’s been cash-only here for three days,” said Ali Wissom, the manager at Il Forno di Jenny’s restaurant off Cyprus’s main square in Nicosia. “The banks have closed, we don’t really know if they will reopen, and all of our suppliers are demanding cash — even the beer company.”

With major banks in Cyprus shut for more than week, a trip to the cash machine became a daily ritual for anyone in need of money. The initial limit on withdrawals was 400 euros. It then fell to 260. As of Sunday night, it slipped to a meager 100 euros.

At the Centrum Hotel, Georgia Xenophontes, 23, an employee in the front office, said she drained her bank account at a cash machine last week — just in time to avoid being hit with the latest withdrawal limit.

“This is affecting everything in our lives,” she said. “Even though you don’t want to count on money, you need it. But we don’t have stability.”

In Brussels, the day was filled with confusion and rancor. Reports filtered out of heated confrontations between Mr. Anastasiades and European Union negotiators, and especially with the International Monetary Fund, which Mr. Anastasiades has accused of trying to push Cyprus up against a wall.

Mr. Anastasiades told officials including Christine Lagarde, head of the monetary fund, that accepting harsh terms might force him to step down.

James Kanter reported from Brussels, and Liz Alderman and Andrew Higgins from Nicosia, Cyprus.

This article has been revised to reflect the following correction:

Correction: March 25, 2013

An earlier version of this article referred imprecisely to the population of Cyprus. It should have said that the country, and not the island itself, has only 860,000 people.

Article source: http://www.nytimes.com/2013/03/25/business/global/cyprus-and-europe-officials-agree-on-outlines-of-a-bailout.html?partner=rss&emc=rss