Cyprus leader defends bailout

A Cypriot woman protests against an EU bailout deal outside the parliament in Nicosia this week. Source: The Australian

PRESIDENT Nicos Anastasiades says a bailout he secured from international creditors had saved Cyprus from collapse but world markets took fright because it might become a model for other larger economies.

The agreement he struck averts a chaotic eurozone exit for the island and allows a partial reopening of bank branches from today after a 10-day shutdown imposed to avoid a run on accounts while the talks dragged on.

But it comes at the expense of job losses in the key financial sector and a massive drying up of credit that threatens a protracted recession.

After a brief rally, world stock markets and the euro nosedived as the severity of the model that had been set for future bailouts of other larger indebted eurozone economies became clear.

The agreement struck with the European Union and the International Monetary Fund deals a major hit to investors and depositors in the island's biggest bank, the Bank of Cyprus, many of whom are Russian, and will also effectively shut down Laiki, its second-largest lender.

Laiki is to be wound up, with what is saved being merged with Bank of Cyprus whose larger depositors will face a "haircut" of 30 per cent, government spokesman Christos Stylianides said.

The European Central Bank announced that in light of the deal it would continue its emergency funding of the two banks which it had threatened to cut off from yesterday. Their merger is likely to lead to major job losses in a sector that had been one of the few growth areas in the island's economy and a drying up of credit to consumers and small businesses.

But wealthy eurozone governments like France and Germany had refused to bail out Cyprus unless it agreed to put an end to what they regarded as a "casino" financial sector dependent on hot money from countries like Russia.

Mr Anastasiades said overnight there had been "no easy solutions" in the marathon talks with international creditors that climaxed in the early hours and expressed confidence that Cyprus would "find its feet again".

He promised the banking system would stabilise and that the merger of what was left of the two main lenders would ensure a "strong and capable bank is created to serve the needs of depositors and the national economy".

"The agreement reached is a painful one but under the circumstances the best we could secure ... Cyprus was a breath away from economic collapse," the conservative president said.

The deal spares all depositors with less than 100,000 Euros ($124,899) in the island's banks, a key condition missing from a previous agreement the Cypriot parliament rejected last week.

But Cyprus could now be in for a "deep recession caused by the shrinkage of the banking sector and severe deleveraging", or paying down of debt, UBS economist Reinhard Cluse said.

Economists have forecast the Cyprus economy could now contract by at least 10 per cent this year and by 8.0 per cent in 2014. Banks on the island will reopen today except for the two big lenders, which will keep their doors closed until Thursday.

"Some restrictive measures on financial transactions" will remain in force, Mr Anastasiades said, stressing that it was a "very temporary measure".

In the face of public outrage over the devastation of the island's prized banking sector, together with huge losses in savings and jobs, he vowed to open a criminal investigation into the crisis.

"I undertake in the next few days for the cabinet to appoint criminal investigators with a clear term of reference to find and attribute responsibility wherever it belongs," Mr Anastasiades said.

The conservative president said he shared the "bitterness and disappointment" felt by many on the island at the attitude of  "some of our respected partners" in the eurozone but insisted that quitting the single currency was not the answer.

German Chancellor Angela Merkel, whose government took a hard line in the talks, said the deal represented a "fair distribution" of the burden and "also requires those who have contributed to causing these undesirable developments to take responsibility".

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