IMF team, Nicosia officials agree on plan to overhaul banking

BRUSSELS — Cyprus will get €1bn from the International Monetary Fund (IMF) as part of the €10bn rescue package it agreed on late last month with eurozone finance ministers that prevented the meltdown of the island’s banking sector and its exit from the euro.

IMF MD Christine Lagarde said the fund would support Cyprus through a three-year loan that aims to help Nicosia consolidate its national finance and restructure its bloated banking sector.

“A staff team of the IMF has reached staff level agreement with the Cypriot authorities on an economic programme that will be supported by the IMF jointly with the European Union (EU) and the European Central Bank (ECB).

“A combined financing package of €10bn is designed to help Cyprus cover its financing needs, including to service debt obligations, while it implements the policies needed to restore the health of the economy and regain access to capital market financing,” Ms Lagarde said.

The European Commission, ECB and IMF want Cyprus to downsize its banking sector, continue existing fiscal consolidation efforts through spending cuts and implement deep structural reforms to improve competitiveness.

As part of the EU-IMF plan, Laiki Bank, the island’s second- largest, will close and the Bank of Cyprus, the biggest, will be restructured.

Cyprus’s banking sector, which is eight times bigger than the country’s gross domestic product, has been severely damaged by its high exposure to bad Greek debt. As the sovereign debt crisis in Greece worsened, Cypriot banks had to take huge losses that penalised its finance-driven economy.

International lenders have agreed to a €10bn rescue of the debt-laden island contingent on the raising of €5.8bn from a Cypriot bank deposit levy

Ms Lagarde admitted that the rescue package would require great efforts from the Cypriot population, as the government of President Nicos Anastasiades will be forced to push through painful reforms to meet the loan’s conditions.

“We believe that it provides a durable and fully financed solution to the underlying problems facing Cyprus and a sustainable path towards a recovery,” she said. “The fiscal and financial policies of the programme seek to distribute the burden of the adjustment fairly among the various segments of the population and to protect the most vulnerable groups,” she added.

This comes a day after Finance Minister Michalis Sarris resigned. Financial Times