Cyprus Bailout Deal Reached, Bringing Relief to Asian and Global Markets

A 10-billionn-euro bailout deal has been reached to prevent Cyprus' banking system from collapsing and keep the country in the Eurozone.


The island faces a deep recession with many businesses to shut, but the rescue could mean one less worry for the nascent economic recovery in Europe and the US. While Cyprus accounts for only 0.2% of the Eurozone's economic output, the psychological effect of an imploding Eurozone member's economy had threatened to undermine market confidence. 


The new deal, agreed upon by Eurozone finance ministers, came a week after the Cypriot parliament rejected a proposed bank levy on small and large deposits, reports the BBC.


To qualify for the bailout, Cyprus needs to raise 5.8 billion euros, forcing the Bank of Cyprus to further limit cash machine withdrawals from 260 euros to 120 euros a day.


All Cyprus banks are to remain shut until Thursday, the Central Bank announced in a shock statement issued late Monday.


In a statement, IMF head Christine Lagarde says the deal provides a "comprehensive and credible plan to deal with the current economic challenges in the country" and "provides the basis for restoring trust in the banking system, which is key to supporting growth."


The plan focuses on dealing with the two problem banks and fully protecting insured deposits in all banks. It addresses upfront the core problem of the banking system through a strategy that ensures debt sustainability and does not excessively burden the Cypriot taxpayer.


The BBC reports that Laiki (Popular) Bank - the country's second-biggest - will be will be split into "good" and "bad" banks, with its good assets eventually merged into Bank of Cyprus, the country's largest financial institution. Deposit-holders with more than 100,000 euros (US$130,000) will face big losses. However, all deposits under 100,000 euros will be "fully guaranteed".


“We believe the plan provides a durable and fully financed solution to the underlying problems facing Cyprus and places it on a sustainable path to recovery,” says Lagarde.


But the chairman of the Cypriot parliament's finance committee, Nicholas Papadopolous, said the agreement made "no economic sense".


"We are heading for a deep recession, high unemployment. They wanted to send a message that the Cypriot economy ought to be destroyed, and they've succeeded in a large part - they've destroyed our banking sector," he told the BBC.


European Commission President Jose Manuel Barroso says the impact of the bailout is uncertain. "I am confident that the program will work, but let's be honest. At this moment, we cannot say exactly what the impact is going to be," Barroso told a news conference. "It will depend on the level of implementation and the commitment of Cyprus itself," he said.


Financial markets in Asia and Europe rose in early trading on news of the agreement.


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