Cyprus reaches 'painful' solution to secure rescue

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NICOSIA, Cyprus (AP) — Cyprus clinched a last-minute solution to avert imminent financial meltdown today after it agreed to slash its oversized banking sector and inflict hefty losses on wealthy depositors in troubled banks to secure a $13 billion bailout.

The deal, described by the country’s politicians as “painful,” was agreed with euro finance ministers in Brussels just in time. The European Central Bank had threatened to cut off crucial emergency assistance to the Cyprus’s embattled banks after today if no agreement was reached.

Without that funding, Cyprus’s banks would have collapsed, dragging the economy down with them and threatening the small Mediterranean island’s membership in the 17-strong group of European Union countries that use the euro — all of which would have sent the EU’s markets spinning.

“The result that was found is right,” German Chancellor Angela Merkel said. “It also makes those who helped cause these undesirable developments play their part. That is how it should be.”

Germany has long insisted Cypriot banks, which attracted foreign investors with high interest rates, needed to contribute to the bailout.

“I think that a fair sharing of the burden was achieved,” she said. “On one hand, the banks have to take responsibility for themselves. That is what we have always said: we do not want taxpayers to have to rescue banks, we want banks to rescue themselves.”

Markets in Europe reacted positively, opening sharply higher, and the euro was back near $1.30.

The mood in Nicosia was more somber, however.

“This decision is painful for the Cypriot people. This decision was a defeat of solidarity, of social cohesion, which are fundamental freedoms, fundamental principles of the European Union,” Parliament President Yiannakis Omirou told AP.

“So as soon as possible we have to prepare our economy to go out from the mechanism and the troika,” he said, referring to the bailout agreement and the three-member delegation from the European Commission, International Monetary Fund and ECB who oversee implementation of bailout measures.

Banks in Cyprus have been closed for more than a week while politicians wrangled on how to raise $7.5 billion to qualify for the rescue. An alternative was needed after the country’s lawmakers resoundingly defeated the initial plan, which would have seized up to 10 percent of funds in people’s accounts in all banks.

While cash has been available through ATMs, many machines have quickly run out. Daily withdrawal limits of $130 were imposed on ATMs of the country’s two troubled lenders, Laiki and Bank of Cyprus, on Sunday. All banks were scheduled to reopen Tuesday — although a final decision on that was expected later today by the Central Bank.

Some form of capital controls will almost certainly be imposed once the banks open to prevent a potential bank run — although the details remained unclear this afternoon. Lawmakers passed a bill last week allowing authorities to restrict financial transactions in times of crisis.

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