Cyprus Bailout Details Emerge After IMF Deal

By MATINA STEVIS in Brussels and ALKMAN GRANITSAS in Athens

The Wall Street Journal

Cyprus and the International Monetary Fund reached an agreement for a €1 billion ($1.28 billion) lifeline on top of the €9 billion bailout the island will get from its euro-zone peers, the IMF said in a statement Wednesday.

The statement set out the tough terms the tiny nation of 800,000 has to meet to get the bailout, calling the task ahead "challenging." Cyprus, an economy of roughly €17 billion in annual output, needs to push through cuts and savings worth 4.5% of gross domestic product by 2018 to hit a primary-surplus target of 4% of GDP outlined in the bailout deal, the IMF statement said. These cuts will come on top of savings worth 5% of GDP the government is already implementing through to 2015. An extra 2% of GDP in extra revenue will come from an increase in the country's corporate tax from 10% to 12.5% and an increase in the tax on interest income from 15% to 30%.

The country's corporate-tax rate will remain among the lowest in Europe, on an equal footing with Ireland's, and will allow Cyprus to continue to use its tax regime to attract businesses, but the increase in withholding tax will make it substantially less attractive as a place for individuals to leave their savings.

The IMF executive deal will be sealed by the IMF executive board in early May, it added.

After two attempts at securing a bailout deal last month that pushed Cyprus to the brink of an exit from the common currency, the country faces major obstacles ahead. To secure the €10 billion in financial aid, it agreed to wind down its second-largest lender, Cyprus Popular Bank, and radically restructure the largest, Bank of Cyprus. In the process, Cyprus became the first country in the three-year-long euro-zone crisis to hit depositors to fund its survival: Cyprus Popular's uninsured depositors will probably lose as much as 80% of their savings over the guaranteed limit of €100,000; Bank of Cyprus savers stand to lose as much as 60% of their uninsured deposits, according to initial government estimates.

Bank assets in Cyprus were roughly seven times the size of the country's economy before the agreement. IMF Managing Director Christine Lagarde, in the written IMF statement, said that "recent actions have already resulted in a substantial reduction in the size of the banking system in relation to the economy." She also noted that "insured depositors (representing over 95% of the total number of account-holders in the two affected banks) have been fully protected."

The initial bailout agreement for Cyprus, which was reached March 16 with backing from the IMF, approved taxing insured depositors. The IMF and all other parties involved hastily distanced themselves from that deal after it was voted down in the Cypriot parliament days later, and have been keen to stress the sanctity of the €100,000 deposit guarantee ever since.

Cypriot banks had remained shut for almost two weeks as officials scrambled for a deal, and upon opening last Thursday, Cypriots and foreigners banking there faced capital-control restrictions never before seen in the euro area.

On Wednesday the country's central bank said that it had unfrozen a portion of large deposits in Bank of Cyprus, moving to gradually ease the controls aimed at preventing a massive deposit hemorrhage following the reopening of the banks. The central bank said it was freeing up 10% of deposits over €100,000 at Bank of Cyprus to allow businesses and individuals access to some of their savings and working capital.

Authorities also eased controls to help businesses meet payments Tuesday. The finance ministry announced that commercial transactions of up to €25,000 per day per account are no longer subject to restrictions. The initial cap on such transactions had been €5,000.

A spokesman for the German finance ministry said Wednesday he expects a memorandum of understanding with the terms of Cyprus's bailout to be ready April 9. High-level euro-zone finance officials were due to review the contents of the memorandum Thursday.

Euro-zone finance ministers are expected to reach a political agreement on the bailout plan in an informal meeting in Dublin April 12, Olivier Bailly, a spokesman for the European Commission said Wednesday. Several euro-zone countries have to approve the deal in their national parliaments and Mr. Bailly said that the process should be completed by the end of April.

That would allow disbursement of aid to begin in May, Mr. Bailly added.

Cyprus's new foreign minister, Harris Georgiades, who was sworn in Wednesday after his predecessor resigned, called on the country's fellow euro members to approve the deal quickly.

"I'm looking forward to a swift ratification of this understanding by the member states; we do need assistance," he said.

Cyprus, he pledged, will "fully implement the MOU…We shall meet all time frames."

—Tom Fairless and Harriet Torry in Berlin contributed to this article.

Write to Matina Stevis at matina.stevis@dowjones.com and Alkman Granitsas at alkman.granitsas@dowjones.com