Cyprus, International Monetary Fund Reach Bailout Deal

Cyprus, International Monetary Fund Reach Bailout Deal

Cyprus and the International Monetary Fund announced on Wednesday that the Washington-based fund will give Cyprus one billion euros ($1.28 billion) over the next three years as a part of the bailout package to stabilize the Cypriot banking sector and reduce public spending. IMF will seek the approval of its executive board in May.

IMF director Christine Lagarde said that the program will require some effort from Cypriot people. It will provide a long-term and fully-financed solution to the country’s financial issues. Cyprus has a GDP of 17 billion euros that represents just 0.2 percent of Eurozone’s economic output. The deal reached late last month prevented the meltdown of country’s banking sector.

Cyprus is the fifth country in the region to receive an international bailout. Christine Lagarde said that the current bailout deal will fully protect the insured depositors that account for 95 percent of account-holders in Bank of Cyprus and Laiki Bank. The troika of ECB, IMF and the European Commission wants the country to downsize its banking industry, continue to work on spending cuts, and implement structural reforms.

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As part of the deal, the second biggest Cypriot bank Laiki will be closed down, while Bank of Cyprus will be restructured. Large deposit holders (accounts with more than 100,000 euros) will immediately lose 37.5 percent of their deposits. Their losses could grow further to 60 percent after the final audit. It’s first time in history that bank depositors have fallen victims to a bailout. And the same method will be used in future European bailouts.

Cypriot banks were devastated by their high exposure to Greek debts. The worsening Greek sovereign debt crisis forced Cypriot banks to take heavy losses. Today, the Bank of Cyprus unfroze 10 percent of uninsured deposits (accounts with over 100,000 euros) to give individuals and businesses access to a part of their savings.

The announcement comes a day after the country’s finance minister Michalis Sarris resigned due to increasing blame game among political parties. Sarris has been replaced by labor minister Haris Georgiades.

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