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Cyprus bailout agreement prevents euro zone exit


Cypriots protests against EU at protest outside a Eurogroup meeting at the European Council building on March 24, 2013 in Nicosia, Cyprus. Talks between the the International Monetary Fund (IMF) and European Union (EU) led to a bailout agreement which would drastically alter Cyprus' financial sector.


Milos Bicanski

A last-minute deal was reached early on Monday between Cyprus and the euro zone countries avoiding the exit of the island country from the euro zone.

"Finally, Cyprus has ended a period of uncertainty and insecurity for the economy. A disorderly default was avoided, which would have meant leaving the eurozone, with devastating consequences," said Cypriot government spokesman Christos Stylianides in a statement.

As part of the deal, Cyprus' Popular Bank, also known as Laiki, will effectively be shut down. Laiki will then be broken up into a bank with valid assets and a "bad bank" with risky assets. The portion with valid assets will be integrated into the Bank of Cyprus, while the bad bank will gradually be dissolved.

The Bank of Cyprus will have to endure a "haircut" tax of around 30 percent on all deposits of more than 100,000 euros ($130,000).

The European Central Bank will provide 9 billion euros ($11.7 billion) of Emergency Liquidity Assistance for the integration.

German Chancellor Angela Merkel said she was "very pleased" with the outcome of the negotiations on Monday. "I believe the agreement that was reached is the right one," she told reporters.

Wealthy Russian depositors are set to lose billions of euros under what have been called "draconian terms," as many placed their money in banks in the Mediterranean tax haven.

Russian President Vladimir Putin has reportedly instructed his government to negotiate the restructuring of a Russian bailout loan to Cyprus.

The announcement Monday, from his spokesman Dmitry Peskov, signals Moscow's support for the bailout deal despite the heavy losses that Russian depositors would incur. Cyprus had requested an extension of a 2.5 billion euro ($3.2 billion) loan from Russia and a reduction in Russia's interest rates.

More on GlobalPost: Cyprus finance minister reports 'significant progress' in bailout talks