Cyprus defends bailout deal amid recession fears

Media playback is unsupported on your device
Media caption"I'm very concerned... for our children, for the future," one Cypriot told the BBC's Tim Willcox

The government of Cyprus has defended a 10bn-euro bailout deal to save its banks from collapse, amid warnings the island faces deep recession.

The agreement protects small savers but depositors with more than 100,000 euros ($130,000; £85,000), many of whom are Russian, face big losses.

Laiki Bank - the country's second largest - will be wound up.

Finance minister Michael Sarris said Cyprus had avoided a "disastrous exit from the eurozone".

In a televised address on Monday evening, President Nicos Anastasiades - who negotiated the deal with the "troika" of the EU, the European Central Bank and the IMF in Brussels - said the agreement was "painful" but the best option under the circumstances.

"I understand your anger," he said.

To qualify for the bailout, Cyprus has to raise 5.8bn euros.

Mr Anastasiades said the agreed measures would be put into practice over the next few days and he called for all Cypriots to work together.

He said the central bank would impose some limited "capital controls" to prevent an outflow of money when banks reopened.

Laiki Bank and the Bank of Cyprus - the country's two biggest - will remain closed until Thursday, but all others will reopen on Tuesday after being closed for more than a week, Cyprus's central bank said.

Chancellor Angela Merkel of Germany - which pushed for terms of the deal - said the cost of the bailout had been fairly distributed.

"We do not want taxpayers to save banks, banks must save themselves," she said.

"This is what will happen in the case of Cyprus."

Dutch Finance Minister Jeroen Dijsselbloem - who chairs the Eurogroup of finance ministers - said the rescue represented a new template for dealing with bank crises in the eurozone, with uninsured depositors bearing some of the cost.

As global markets fell following his remarks, Mr Dijsselbloem issued a clarification, saying Cyprus was a "specific case with exceptional challenges".

Earlier, Russian Prime Minister Dmitry Medvedev said losses imposed on big depositors - many of them Russian - amounted to "stealing".

"What is going on around Cyprus is that they are continuing to plunder loot there," Mr Medvedev said.

"It is necessary to understand where this story will lead, and what its consequences will be for the international financial system and our interests," he added.

Suspicion has been growing in Russia that Europe is using the crisis to target Russian money in Cyprus, the BBC's Steve Rosenberg in Moscow says.

Nonetheless, President Vladimir Putin has told Russian officials to restructure a 2.5bn-euro loan extended to Cyprus in 2011 in order to support the restructuring effort.

The European Central Bank had set a deadline of Monday for the deal, which came a week after the Cypriot parliament rejected a proposed bank levy on small and large deposits.

The levy would have taken 6.75% from small savers and 9.9% from larger investors and caused widespread anger among ordinary savers.

On Friday the new bank restructuring plan was passed by Cypriot MPs. No further vote is needed as there is no levy on deposits under 100,000 euros, which are insured under EU deposit guarantee rules.

However, the Memorandum of Understanding between Cyprus and the EU - the formal agreement that triggers eurozone bailouts - will probably require the Cypriot parliament's approval, according to the Open Europe think tank.

A "no" vote at that stage could still put Cyprus's eurozone membership at risk.

Cypriot government spokesman Christos Stylianides said the deal had prevented a "disorderly" exit from the euro.

"The important thing is that we have reached an agreement that allows us to kick-start the economy and lay the groundwork for a new beginning," he said in a statement.

IMF head Christine Lagarde said the bailout deal agreed was "a comprehensive and credible plan" to help restore trust in the banking system.

Media playback is unsupported on your device
Media captionIMF chief Christine Lagarde: "We believe that this will form a durable and fully financed solution"

There will be relief in Cyprus that small depositors have been protected, but the deal comes at a heavy price, BBC correspondents say.

The economy is expected to shrink sharply as offshore banking - Cyprus's main industry - is effectively shut down.

The chairman of the Cypriot parliament's finance committee, Nicholas Papadopolous, said the agreement made "no economic sense".

"We are heading for a deep recession, high unemployment. They wanted to send a message that the Cypriot economy ought to be destroyed, and they've succeeded in a large part - they've destroyed our banking sector," he told the BBC.

Under the agreement, Laiki will be split into "good" and "bad" banks, with its good assets eventually merged into Bank of Cyprus.

The percentages to be raised from uninsured deposits of more than 100,000 euros in Laiki bank and in Bank of Cyprus have not yet been announced.

Mr Stylianides said the figure could be "around 30%" for uninsured Bank of Cyprus deposits. Other estimates have put the figure at about 40%.

Correspondents say Germany has pushed hard for a levy on investors who have benefited from high interest rates in recent years, rejecting a Cypriot plan to use money from pension funds.

A Cypriot attempt to secure Russian help was unsuccessful.