EU Finance Ministers Approve Last Minute Cyprus Bailout

CYPRUS—The dire financial situation in Cyprus, which last week caused turmoil in world markets, has been resolved in a last minute deal struck early Monday with EU finance ministers that will allow the island nation to avoid both bankruptcy and a proposed tax on bank deposits under 100,000 euros. The bad news is that the 10 billion euro bailout comes with harsh terms, including significant losses imposed on large bank deposits, that promise to "deepen the recession in Cyprus," according to the Washington Post.

The deal also calls for a systematic shrinking of Cyprus’ banking sector, including the immediate dissolution of the country’s second-largest bank, Laiki, which will be assimilated “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."

Jeroen Dijsselbloem, chair of the EU finance ministry, was unable to estimate the extent of losses the largest depositors of Laiki can expect to suffer, but according to the Post, “he noted that it is expected to yield 4.2 billion euros overall — or much of the money that Cyprus needed to raise to secure the bailout. Analysts have estimated investors might lose up to 40 percent of their money."

The EU ministers also said in a statement announcing the last minute agreement that "large deposits held by Bank of Cyprus will be frozen until it can be determined whether or to what extent they will also be forced to take losses."

The country has also introduced capital controls intended to avoid a massive depositor flight once banks reopen.

As severe as these measures are, the EU ministers claim they are necessary if there is to be a "fundamental restructuring of the country's outsized financial system, which is worth up to eight times the Cypriot gross domestic product of about 18 billion euros. They said the country's business model of attracting foreign investors, among them many Russians, with low taxes and lax financial regulation had backfired and needed to be upended."

The country's banks, which have been closed all week over fears that depositors small and large would drain their accounts, are expected to open Tuesday.

Cyprus President Nicos Anastasiades, in office for less than a month, said Monday that despite the deal his country still faces an "arduous future."

Olli Rehn, the European Union commissioner for economic and monetary affairs, concurred, saying, "The near future will be very difficult for the country and its people."

And its largest depositors, many of whom are foreign nationals as well as businesses that took advantage of a notoriously amenable banking sector that the New York Times noted has been criticized by Germany and other countries as being "far too big and too indulgent toward money tainted by crime."