Cyprus and its euro zone partners early on Monday reached a deal on a 10-billion euro ($13 billion) bailout package for the island nation to avoid bankruptcy and to keep it within the single currency group.
The finance ministers of the euro zone nations agreed at an emergency meeting in Brussels to down size the banking sector to achieve the EU average by 2018 and to gradually dissolve the laiki Bank, the country's second largest bank.
Restructuring the Cypriot banks has been one of the main demands of the EU, which regards the island's banking sector as "too big" compared to its economic output.
Cyprus' increasing significance as a tax haven and hub for money laundering also has been a concern for its EU partners.
The Cypriot parliament had last Tuesday rejected a plan to raise up to 5.8 billion euros ($7.9 billion) to finance the recapitalisation of the ailing banks by charging a levy of 6.75 per cent on deposits between 20,000 and 100,000 euros and 9.9 per cent above that level. This had earlier been agreed in the bailout package deal over a week ago.
Winding down the laiki Bank "is the most important decision we have taken tonight", Jeroen Dijsselbloem (rpt) Dijsselbloem, President of the euro group, said after a nine-hour meeting, which lasted till the early hours on Monday.
The situation of the laiki Bank has been "very critical" in the past weeks and "it cannot be saved", he told a news conference.
The assets of laiki Bank will be split into "good" and "bad" ones.
While its "good" assets will be absorbed into the Bank of Cyprus, the country's largest bank, the "bad" assets of laiki Bank will be gradually dissolved.
All deposits up to 100,000 euros will be transferred to the Bank of Cyprus and deposits above that level will be subjected to a levy, which will be decided in the coming weeks, Dijsselbloem said.
The aim is to ensure that there will be a "solid bank" with a capital ratio of 9 per cent at the end of the restructuring programme, he said, adding a bank levy on deposits up to 100,000 euros "can and will be avoided." "None of these measures will affect deposits below 100,000 euros," Dijsselbloem said.
The agreement on a bailout came after several hours of tough negotiations between Cypriot President Nicos Anastasiades and the "troika" comprising officials of the European Commission, the International Monetary Fund and the European Central Bank.
The opening of the euro group meeting was delayed by several hours as they struggled to find a compromise.
Cyprus was under mounting pressure to reach an agreement with its euro zone partners after the European Central Bank (ECB) last week threatened to cut off its emergency liquidity assistance, which kept the nation's banks afloat, if no agreement is reached with its EU partners by Monday.