£8bn loan agreed for bailout of Cyprus

In return for the rescue loans Cyprus will cut its deficit, shrink its banking sector, raise taxes and privatise state assets, said Jeroen Dijsselbloem, the Dutchman presiding over meetings of the 17-nation Eurozone’s finance ministers.

“The assistance is warranted to safeguard financial stability in Cyprus and the Eurozone as a whole,” he said, after nearly ten hours of negotiations.

While the bailout is much smaller than those for Greece or Ireland, it was still considered crucial to the Eurozone’s future as a Cypriot default could rock financial markets and undermine confidence in other Eurozone states.

To reduce the amount of bailout loans, Cyprus needs to keep its government afloat and recapitalise its banks. Ministers agreed to make sizeable Greek operations of the country’s two largest banks, Bank of Cyprus and Laiki, eligible for spare rescue cash from Greece’s bailout accord.

To raise enough new revenues, some creditors were also pushing Cyprus to accept a one-time levy of 10 per cent on people with more than ¤100,000 (£86,000) in Cypriot bank accounts.

Analysts warned such a move would undermine investors’ confidence in other weaker Eurozone economies and risk a run on the banks.

Dijsselbloem said Cyprus’ outsized banking sector required “unique measures” but did not immediately comment on whether or not the one-off levy had been agreed.

The economy of Cyprus, an island of almost a million people, represents less than 0.2 per cent of the Eurozone’s annual economic output. But even the most reluctant EU partners such as Germany have accepted it would be better to bail out Cyprus than to let it go bankrupt, which could rekindle the bloc’s three-year-old debt crisis.