BBC

The government of Cyprus has defended a 10bn-euro bailout deal to save its banks from collapse, amid warnings the island faces deep recession.

Laiki (Popular) Bank, the country’s second largest, will be wound up, but small savers will be protected.

Depositors with more than 100,000 euros ($130,000; £85,000), many of whom are Russian, face big losses.

President Putin has told Russian officials to restructure a 2.5bn-euro loan extended to Cyprus in 2011.

Suspicion has been growing in Russia that Europe is using the banking crisis to target Russian money in Cyprus, the BBC’s Steve Rosenberg in Moscow says.

The European Central Bank had set a deadline of Monday for the deal, which came a week after the Cypriot parliament rejected a proposed bank levy on small and large deposits.

On Friday the new bank restructuring plan was passed by Cypriot MPs. No further vote is needed as there is no levy on deposits under 100,000 euros, which are insured under EU deposit guarantee rules.

However, the Memorandum of Understanding between Cyprus and the EU – the formal agreement that triggers eurozone bailouts – will probably require the Cypriot parliament’s approval, according to the Open Europe think tank.

A “no” vote at that stage could still put Cyprus’s eurozone membership at risk.

‘Destroyed’

The people of Cyprus now face a shrinking economy with the main industry, offshore banking, being shut.

However, Cypriot government spokesman Christos Stylianides said the deal had prevented a “disorderly” exit from the euro.

“The important thing is that we have reached an agreement that allows us to kick-start the economy and lay the groundwork for a new beginning,” he said in a statement.

“Without doubt that there are painful aspects that will place a burden on all of us.”

IMF head Christine Lagarde said the bailout deal agreed was “a comprehensive and credible plan” to help restore trust in the banking system.

There will be relief in Cyprus that small depositors have been protected, but the deal comes at a heavy price, BBC correspondents say.

The chairman of the Cypriot parliament’s finance committee, Nicholas Papadopolous, said the agreement made “no economic sense”.

“We are heading for a deep recession, high unemployment. They wanted to send a message that the Cypriot economy ought to be destroyed, and they’ve succeeded in a large part – they’ve destroyed our banking sector,” he told the BBC.

EU Commissioner for Economic Affairs Olli Rehn conceded that the “depth of the financial crisis in Cyprus means that the near future will be difficult for the country and its people”.

Financial markets in Asia and Europe rose on news of the agreement.

Bailout deal

To qualify for 10bn-euro bailout, Cyprus must raise 5.8bn euros

Its biggest bank – Bank of Cyprus – to be restructured

Second biggest bank – Laiki – to be wound up and split into a “good” bank and “bad” bank

Accounts holding under 100,000 euros will be protected in both banks

Deposits over 100,000 in Bank of Cyprus are frozen for now

Level still to be set at which funds on big deposits will be taxed

European Commission president Jose Manuel Barroso said he had decided to set up a task force to provide technical assistance to the Cypriot authorities.

Cash cap

The deal came after hours of tense negotiations between Cypriot President Nicos Anastasiades and the “troika” of EU, European Central Bank and IMF leaders.

Under the agreement all deposits of less than 100,000 euros will be secured.

Laiki will be split into “good” and “bad” banks, with its good assets eventually merged into Bank of Cyprus.

The percentages to be raised from uninsured deposits of more than 100,000 euros in Laiki bank and in Bank of Cyprus have not yet been announced.

Mr Stylianides said the figure could be “around 30%” for uninsured Bank of Cyprus deposits. Other estimates have put the figure at about 40%.

Banks in Cyprus have been closed since last Monday while politicians and officials tried to work out how to raise 5.8bn euros to qualify for the bailout. Many businesses are only taking payment in cash.

Eurozone bailouts – graphic

On Sunday, Bank of Cyprus further limited cash machine withdrawals to 120 euros a day.

With queues growing outside cash machines across the island, Laiki also lowered its daily limit to 100 euros, Cyprus News Agency reported. The bank’s previous limit had been 260 euros per day.

The details of the reopening of Cyprus’s banks were to be discussed on Monday.

German pressure

A week ago, the Cypriot parliament rejected a planned bank levy that would have taken 6.75% from small savers and 9.9% from larger investors. The proposal caused widespread anger among ordinary savers.

In response, the European Central Bank (ECB) had said it would cut off funds to Cyprus’s banks by Monday unless a new deal was reached.

There is concern on the Mediterranean island that a levy on large-scale foreign investors, many of whom are Russian, will damage its financial sector.

Correspondents say Germany has pushed hard for a levy on investors who have benefited from high interest rates in recent years, rejecting a Cypriot plan to use money from pension funds.

A Cypriot attempt to secure Russian help was