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Euro Zone Strives for Breakthrough in Bailout Package for Cyprus After Negotiations, Cyprus Agrees to a Euro Zone Bailout Package
(about 2 hours later)
BRUSSELS — Finance ministers from euro area countries met here on Friday as a showdown loomed with the International Monetary Fund over the size of a rescue deal for Cyprus seen as critical to the stability of the single currency. BRUSSELS — Cyprus reached a long-awaited bailout agreement early Saturday that puts some of the burden for shoring up the island’s beleaguered economy on its bank depositors.
The talks could stretch into the weekend, with finance ministers expected to seek to limit the overall costs of the rescue plan. Christine Lagarde, the president of the I.M.F., is expected to push for a deal that is generous enough to enable Cyprus eventually to pay the money back. The most contentious issue in months of negotiations was whether to force Cypriot depositors to take losses in order to make the country’s debt more manageable. The Cypriot authorities had sought to head off any such initiatives on the grounds that they would do lasting damage to their financial services sector.
The Cypriot authorities want a plan that ensures that the island remains attractive to investors, who include many Russians with large deposits in the country’s banks. In the early hours of Saturday morning, after 10 hours of talks, finance ministers from euro area countries, the International Monetary Fund and the European Central Bank agreed on terms that include a one-time tax of 9.9 percent on Cypriot bank deposits of more than 100,000 euros, according to a person with direct knowledge of the talks who asked not to be identified while ministers still were hammering out details in private.
Jeroen Dijsselbloem, the president of the group of ministers, told a late night news conference that lenders had reached “a political agreement” to aid Cyprus. The challenges to reaching a deal were “of an exceptional nature,” he said.
Going into the meeting, finance ministers sought to limit the overall costs of the rescue plan while Christine Lagarde, the president of the I.M.F., pushed for a deal that is generous enough to enable Cyprus eventually to pay the money back.
The Cypriot authorities wanted a plan that ensures that the island remains attractive to investors, who include many Russians with large deposits in the country’s banks.
Ms. Lagarde was blunt about the need for ministers to agree to a realistic package of measures. “All I know is that we don’t want a Band-Aid,” she said. “We want something that lasts, something that is durable and that will be sustainable.”Ms. Lagarde was blunt about the need for ministers to agree to a realistic package of measures. “All I know is that we don’t want a Band-Aid,” she said. “We want something that lasts, something that is durable and that will be sustainable.”
The key to a breakthrough is finding a way to bring down the size of any bailout package, estimated at 17 billion euros ($22.2 billion). The amount is small compared with the rescue deal for Greece, but would represent almost as much as Cyprus’s gross domestic product, which is about 18 billion euros. The key to a breakthrough was finding a way to bring down the bailout package, estimated at 17 billion euros ($22.2 billion). That amount is small compared with the rescue deal for Greece, but represents almost as much as Cyprus’s gross domestic product, which is about 18 billion euros.
European governments and the I.M.F. were expected to structure a bailout so that creditors including the European Central Bank reached a deal closer to 10 billion to 13 billion euros. The deal that emerged on Saturday morning was for a bailout of up to 10 billion euros, Mr. Dijsselbloem said.
Jeroen Dijsselbloem, the president of the Eurogroup, which gathers finance ministers from countries in the euro zone, refused to speculate about the size of the deal. Cyprus asked for the bailout in June last year. But talks faltered when the former president Demetris Christofias, a Communist, balked at measures like privatizations. The talks sped up after the election last month of Nicos Anastasiades of the Democratic Rally, a center-right party, to the presidency.
“I know what my main goals are,” Mr. Dijsselbloem said, adding that they were to make “sure that there is stability in the euro zone and that there is a new sustainable growth path possible for Cyprus.” The other elements of a deal were expected to involve Cyprus raising its low corporate tax rate, privatizing state assets and overhauling its banks to ensure that they are not havens for money laundering.
The most contentious issue is whether to force Cypriot depositors to take losses — perhaps in the form of a one-off tax on their holdings — in order to make the country’s debt more manageable. The Cypriot authorities have condemned any such initiatives on the grounds that they would do lasting damage to their financial services sector. Russia also was expected to contribute to the arrangement, perhaps by agreeing to lower the interest rate on a loan worth 2.5 billion euros it has already made to Cyprus.
The other elements of a deal could involve Cyprus raising its low corporate tax rate, privatizing state assets and overhauling its banks to ensure that they are not havens for money laundering. Another factor is whether Russia will agree to lower the interest rate on a loan worth 2.5 billion euros it has already made to Cyprus.
Mujtaba Rahman, a senior analyst with the Eurasia Group, a political risk research and consulting firm, said it was likely that countries like Germany and Finland would ultimately reach a deal with the I.M.F.Mujtaba Rahman, a senior analyst with the Eurasia Group, a political risk research and consulting firm, said it was likely that countries like Germany and Finland would ultimately reach a deal with the I.M.F.
“The fact is that some governments in the north of Europe need the I.M.F. also to be contributing money to Cyprus in order to convince their parliaments to give approval to a deal,” Mr. Rahman said.“The fact is that some governments in the north of Europe need the I.M.F. also to be contributing money to Cyprus in order to convince their parliaments to give approval to a deal,” Mr. Rahman said.
The ferocious debate over how much pressure to put on euro area countries in difficulty stepped up a notch on Friday after it emerged that Mario Monti, the departing prime minister of Italy, suggested that the demands placed on him to tighten his country’s finances had been unfair.
In a letter sent Thursday to other European Union leaders at the start of a two-day summit meeting here on the economy, Mr. Monti wrote that Italy “has been delivering on all the policy objectives” set out by the union. But, in a thinly veiled reference to Spain, Portugal and Greece, he wrote that other countries “have been given extra time to reach their budgetary objectives.”

This article has been revised to reflect the following correction:

This article has been revised to reflect the following correction:

Correction: March 15, 2013Correction: March 15, 2013

Because of an editing error, a headline on an earlier version of this article misspelled the name of the country in talks to receive a bailout. It is Cyprus, not Cypress.

Because of an editing error, a headline on an earlier version of this article misspelled the name of the country in talks to receive a bailout. It is Cyprus, not Cypress.