Cyprus’s government and international lenders have reached agreement on a bailout loan of up to 10 billion euros ($13 billion).
The deal is expected to lead to the closure of Cyprus’s second-largest bank.
It is also expected to inflict heavy losses on uninsured depositors, including wealthy Russians.
The Russian government has responded negatively to the news. Russian Prime Minister Dmitry Medvedev said on March 25 that the deal amounts to “stealing” and ordered a study of the consequences.
President Vladimir Putin asked the Russian government to restructure 2.5 billion euros ($3.2 billion) in loans already made to Cyprus.
Cyprus was facing a March 25 deadline to reach a deal or face a cutoff of funding from the European Central Bank – a move that could have forced the government to declare bankruptcy and lead to Cyprus’s possible expulsion from the eurozone.
At a news conference in Brussels on March 25, Cypriot Finance Minister Michalis Sarris said the deal ends a period of uncertainty but not the difficulties for his country.
"I don't think that there is any denying that the Cyprus people will have to go through some tough times and will suffer the consequences of a protracted period where wrong decisions were made," he said.
Lenders had demanded that the Mediterranean island nation raise 5.8 billion euros ($7.5 billion) from its own banking sector to secure the bailout.
Under the deal, depositors with more than 100,000 euros in the country's second-largest bank, Laiki, will lose an unspecified amount of their money.
It was not immediately clear what percent of deposits will be seized. But officials said the seizure of funds from the bank could raise as much as 4.2 billion euros.
It does not appear that Cypriot lawmakers will take a vote on the plan.
Lawmakers late last week approved new banking measures after rejecting a controversial proposal to seize a percentage of funds from all depositors in Cypriot banks.
Eurogroup Chairman Jeroen Dijsselbloem said senior bond holders in Laiki Bank would be “wiped out,” while depositors in the biggest bank, the Bank of Cyprus, will have to endure a major “haircut” of their funds. The Bank of Cyprus is expected to survive the crisis.
Dijesselbloem offered assurances that depositors with less than 100,000 euros will not be affected.
"I would like to emphasize that none of these measures will affect deposits below 100,000 euros," he said. "There should be no doubts about that."
Cyprus is expected to receive the first funds of the 10 billion-euro bailout in May.
Olli Rehn, the European commissioner for economic and monetary affairs, said Cypriots should prepare to face a “very difficult” economic and social situation.
"It is clear that the depth of the financial crisis in Cyprus means that the near future will be very difficult for the country and for its people," Rehn said. "The [European] Commission will do everything possible to alleviate the social consequences of this economic shock and help protect the most vulnerable people."
Cypriot banks have been closed for the past 10 days as government officials and the troika of international lenders – the European Commission, the European Central Bank, and the International Monetary Fund – have struggled to formulate a solution to the crisis.
Cyprus's central bank has imposed a daily withdrawal limit of 100 euros from automatic teller machines at the two largest banks to prevent massive withdrawals by depositors.
Banks are due to reopen March 26.
International Monetary Fund chief Christine Lagarde said the deal provided "a comprehensive and credible plan to deal with the current economic challenges in the country.”
No comment was immediately available from Cypriot President Nicos Anastasiades.
Reports said the president at one point threatened to resign during some 12 hours of negotiations with international officials.
With reporting by AP, Reuters, and AFP