By Mark Thompson
LONDON (CNNMoney) — Cyprus has won approval from the European Union for a plan to shrink its financial industry and raid the accounts of big depositors at its two leading banks, clearing the way for a €10 billion bailout the island nation needs to avoid collapse.
The deal was struck early Monday after days of frantic negotiations that followed the rejection by Cypriot lawmakers of Plan A. That deal, struck little over a week ago with EU and International Monetary Fund support, would have imposed a tax on all bank account holders.
“We have agreed,” Cyprus President Nicos Anastasiades told reporters after a meeting with eurozone finance ministers. He said the deal was in “the best interests of the Cyprus people and the EU as a whole.”
Jeroen Dijsselboem, who chaired the meeting, said the plan had the support of all eurozone member states.
The new bailout program includes deep restructuring of the country’s two biggest banks — Bank of Cyprus and Popular Bank of Cyprus. All told, the domestic banking industry would be shrunk to average EU size by 2018, he said.
Without a deal, the tiny state risked losing emergency funding from the European Central Bank as early as Tuesday. That would have meant financial collapse and almost certain exit from the eurozone.
Cyprus, which accounts for just 0.2% of the eurozone economy, needed to find a way to raise nearly €6 billion to qualify for the €10 billion on offer from the EU and IMF.
The original proposal for a one-off levy of up to 10% on all bank accounts, including deposits up to €100,000 covered by a national guarantee scheme, outraged Cypriots and prompted condemnation for trashing the principle that ordinary savers should not pay for bank failures.
Cypriots have been queuing at cash machines since it was first announced on March 16. Banks have been shut since then and are due to reopen Tuesday.
The Cyprus parliament passed bills Friday to raise funds from state and church assets and to impose strict controls on the movement of capital in a bid to prevent a disastrous run on the country’s banks. Smaller daily withdrawal limits have been introduced at some ATMs.
Plan B will protecting all deposits of less than €100,000 euros but is likely to mean much bigger losses for account holders with more than €100,000 at the two leading banks. Bank of Cyprus will be restructured and Popular Bank will be wound down.
Cyprus has been brought to its knees by the losses that its oversized banking sector sustained on investments in Greece, as well as a deep recession. Total deposits of around €70 billion euros are about four times the size of the economy.
Eurozone policymakers wanted Cyprus to stump up cash from its banks as part of the rescue to ensure the country’s debt doesn’t become unsustainable. The total bailout, including Cyprus’ contribution, is almost as big as the country’s annual economic output.
And the EU believes wealthy foreigners who have profited from Cyprus’ low tax rates should contribute. More than half of bank deposits are held by foreigners, many of them Russian.