Cyprus Bailout: Island Nation Avoids Bankruptcy (VIDEO)

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BRUSSELS - 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 cash-strapped island nation needs a 10 billion euro ($13 billion) bailout to recapitalize its ailing lenders and keep the government afloat. The European Central Bank had threatened to cut crucial emergency assistance to the country's banks by Tuesday without an agreement.

The finance ministers of the 17-nation eurozone accepted the plan reached in 10 hours of negotiations in Brussels between Cypriot officials and the so-called troika of creditors: the International Monetary Fund, the European Commission and the ECB.

Under the plan, Cyprus' second-largest bank, Laiki, will be restructured and holders of bank deposits of more than 100,000 euros will have to take losses, the diplomats said. They spoke on condition of anonymity pending the official announcement. It was not immediately clear whether the holders of large deposits in the remaining Cypriot banks would equally be forced to take losses.

The diplomats also did not elaborate on how much large deposit holders would lose. Making them take a hit is expected to net several billion euros, reducing the amount of rescue loans the country needs.

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 spur turmoil in the eurozone of 300 million people.

To secure a rescue loan package, Nicosia had to find ways to raise 5.8 billion euros so it could qualify for the 10 billion euro bailout package. 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.

But Cyprus resisted pressure by creditors to also unwind the country's largest lender, Bank of Cyprus, the diplomat said.

A plan agreed to in marathon negotiations earlier this month called for a one-time levy on all bank depositors in Cypriot banks. But the proposal ignited fierce anger among Cypriots because it also targeted small savers. It failed to win a single vote in the Cypriot Parliament.

Under the new agreement, average savers' deposits with all Cypriot banks of up to 100,000 euros will be guaranteed by the state in accordance with the EU's deposit insurance guarantee, the diplomat said.

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.

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.

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Associated Press writers Elena Becatoros and Menelaos Hadjicostis in Nicosia, Cyprus, contributed to this story.

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Don Melvin can be reached at https://twitter.com/Don_Melvin.

Juergen Baetz can be reached at http://www.twitter.com/jbaetz

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