Brussels: The euro zone finance ministers on Saturday reached a deal on a 10 billion-euro (13 billion dollars) financial rescue package for debt-stricken Cyprus to avert a bankruptcy.
The Mediterranean island nation becomes the fifth euro zone member to receive a bailout from the European Union and the International Monetary fund (IMF) since Greece was rescued in the wake of the sovereign debt crisis in May, 2010.
Cyprus had applied for a bailout in June, last year to prop up the country`s banking sector, crippled by its heavy exposure to the Greek government debts and by the losses on loans given to Greek banks and businesses.
Negotiations on its application were delayed by last month`s presidential election and by allegations of money laundering by wealthy Russians, who have business interests on the island and deposits in the country`s banks.
Some euro zone member nations, especially Germany, had pressed for depositors in Cypriot banks to pay for the rescue.
The agreement on a bailout, which came after more than ten hours of negotiations by the finance ministers in Brussels was made possible by the election of Nicos Anastasiades as the new president and an independent audit of the country`s implementation of anti-money laundering measures approved by the new government.
The euro group has agreed with the Cypriot authorities an ambitious adjustment programme based on measures in areas of fiscal consolidations, structural reforms and privatisation, president of the 17-nation group Jeroen Dijsselbloem said.
The challenges facing Cyprus "are of exceptional nature" and therefore certain unique measures are necessary to tackle them, he told a news conference after the meeting.
The euro group is confident that the measures agreed and their strict implementation will allow the country`s public debt, which is projected to grow to 100 per cent of the GDP by 2020, to remain on a sustainable path, Dijsselbloem said.
The euro group agreed that financial assistance for Cyprus is warranted to safeguard financial stability in Cyprus and in the euro area as a whole, he said.
The bailout package, which is smaller than 17.5 billion euros (around 22 billion dollars) originally sought by the Cypriot government, will be used to recapitalise the country`s struggling banks, to service the government`s debts and to finance short-term capital requirements of the government.
Without the emergency assistance, Cyprus faced the threat of a bankruptcy in May.
In return, the Cypriot government agreed to restructure its banking sector, to increase corporate tax by 2.5 per cent to 12.5 per cent and to charge a one-time levy of 9. 9 per cent on deposits above 1,00,000 euros in Cypriot banks.
The Cypriot government will also impose a tax of 6.7 per cent on smaller deposits and a tax on interests that the deposits generate.
These measures are expected to generate an additional revenue of around 5.8 billion euros.
The IMF, which had actively participated in the previous bailouts of Greece, Ireland, Portugal and Spain, welcomed the agreement with Cyprus and said it will support the latest financial rescue of a euro zone member.
IMF managing director Christine Lagarde, who attended the finance ministers` meeting said she is considering proposing a contribution from our institution for financing this package.
Olli Rehn, EU commissioner for economic and monetary affairs, expressed optimism that the agreement will help Cyprus return to the path of economic recovery and stability.
A denial of the emergency loan for Cyprus would have jeopardised the progress that has been made over the past year towards stabilising the euro area, he said.