A Cypriot man holds a banner against the EU bailout deal and German Chancellor Angela Merkel's call for Cyprus to follow economic reforms outside the parliament building in Nicosia on March 18, 2013. (Photo: AFP/Getty Images)
(TheBlaze/AP) -- Cyprus secured a package of rescue loans in tense, last-ditch negotiations early Monday, two EU diplomats said, saving the country from a banking system collapse and bankruptcy.
The crisis began a little over a week ago when, as part of an international agreement, those who had money in Cypriot banks were told that between 6% and 10% of their bank deposits would be "taxed" to help pay for the country's bailout. Bank runs and riots soon ensued, and world leaders have been working on a potentially modified agreement.
The cash-strapped island nation needs a 10 billion euro ($13 billion) bailout to recapitalize its ailing lenders and keep the government afloat, but it's unclear how exactly Cyprus will gather the money to pay for its contribution.
Under the last-ditch agreement, Cyprus' second-largest bank, Laiki, will be restructured and holders of bank deposits of more than 100,000 euros will have to take losses. It was not immediately clear whether the holders of large deposits in the remaining Cypriot banks would also be forced to take losses.
The diplomat, who spoke on condition of anonymity pending the official announcement, did not elaborate on how much large deposit holders would lose. But the country is expected to raise 5.8 billion euros to qualify for the 10 billion euro bailout package, so it won't be insignificant.
The bulk of that money is now being raised by forcing losses on large deposit holders as well as bond holders in Laiki bank, which will be split into a bad bank of toxic assets and a remaining viable core business.
Here's ZeroHedge's interpretation of the story at this point:
The terms, unsurprisingly what zee Germans wanted, are i) Laiki to be wound down; ii) Bank of Cyprus to survive but with deposit haircuts, and iii) deal would see secured deposits in Laiki moved to Bank of Cyprus. In other words, a deal far worse then the original [one] proposed by the Eurogroup last week - when the banks still existed. The key appears to be the 'saving' of the insured depositors (crucial to avoid a pan-European bank run) and the crushing of the 'whale' depositors. S&P 500 futures and EUR are surging, Gold is dropping modestly. We await final confirmation of the final terms of the final deal once the Cypriot people wake up (and don't forget the ECB 'standard of living' rules). The Cypriot Parliament still has to vote for this - and not one of the voted for it last week.
The initial proposal ignited fierce anger among Cypriots because it also targeted small savers. It failed to win a single vote in the Cypriot Parliament, but under the new agreement average savers' deposits with all Cypriot banks of up to 100,000 euros will be guaranteed by the state, the diplomat said.
Without a deal by Monday night, the tiny Mediterranean island nation of about 1 million would have faced the prospect of bankruptcy, which could force it to abandon the euro currency and spurred turmoil in the eurozone of 300 million people.
In an illustration of the depth of the fear of a banking collapse, Cyprus' central bank on Sunday imposed a daily withdrawal limit of 100 euros ($130) from ATMs of the country's two largest banks to prevent a bank run by depositors worried about their savings.
Protestors shout slogans against EU at protest outside a Eurogroup meeting at the European Council building on March 24, 2013 in Nicosia, Cyprus. (Photo: Getty Images)
Cypriot banks have been closed this past week while officials worked on a rescue plan, and they are not due to reopen until Tuesday. Cash has been available through ATMs, but long lines formed and many machines have quickly run out of cash.
The international creditors, led by the IMF, were seeking a fundamental restructuring of the outsized financial system, which is worth up to eight times the country's gross domestic product of about 18 billion euros. They say the country's business model of attracting foreign investors, among them many Russians, with low taxes and lax financial regulation has backfired and must be upended.
They also insisted that Cyprus couldn't receive more loans because that would make its debt burden unsustainably high.
After the eurozone's finance ministers' approval, the ECB is expected to continue providing liquidity to the Cypriot banks, avoiding an imminent collapse. Several national parliaments in eurozone countries such as Germany then must also approve the bailout deal, which might take another few weeks.
This is a breaking news story. Updates will be added.
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