March 16, 2013 / 2:22 AM / 5 years ago

Euro zone agrees 10 billion euros bailout for Cyprus

BRUSSELS (Reuters) - International lenders struck a deal on Saturday to hand Cyprus a bailout worth 10 billion euros (8 billion pounds) to stave off bankruptcy, a senior euro zone official said.

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 and IMF chief Christine Lagarde 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.

Under the emergency lending programme, Cyprus agreed to increase its nominal corporate tax rate by 2.5 percentage points to 12.5 percent, the senior source involved in the negotiations told Reuters.

Nicosia will also impose a 9.9 percent one-off levy on deposits above 100,000 euros in Cypriot banks and a tax of 6.75 percent on smaller deposits.

There will also be a tax on interest that the deposits generate, the official said.

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.

Cyprus, with gross domestic product of barely 0.2 percent 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 euro zone public finances fostered by the European Central Bank’s promise to do whatever it takes to shore up the currency bloc.

German Chancellor Angela Merkel underscored the priority that was being given to solving the country’s problems at a news conference on Friday after a meeting of European Union leaders.

“To leave Cyprus up to its own devices and simply see what happens would not be responsible, in my view,” Merkel said.

Russia could help finance the programme by extending a 2.5 billion euro loan already made to Cyprus by five years to 2021 and potentially reducing the interest rate, which is now at 4.5 percent, officials have said.

Cypriot Finance Minister Michael Sarris will travel to Moscow for meetings on Monday, Cypriot diplomats said, raising the possibility that an agreement on participation can be struck with the Russians.

Cyprus originally estimated that it needed about 17 billion euros - almost the size of its entire annual output - to restore its economy to health. Up to 10 billion euros of that were earmarked to recapitalise its banks and 7 billion required for servicing debt and running general government operations.

But because a loan of that magnitude would increase its debt to unsustainably high levels and call into question its ability ever to pay it back, policymakers sought to reduce it by finding more revenue sources in Cyprus itself.

The International Monetary Fund had pushed the idea that depositors in Cypriot banks should bear some of the costs of bailing out the island, a process dubbed “bail-in”. But that approach was rejected by Cyprus, the European Commission and some members of the ECB. ($1 = 0.7654 euros)

Additional reporting by Robin Emmott, John O'Donnell and Julien Ponthus. Writing by Mike Peacock

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