* EU sources say deal to shut Laiki, transfer insured
* Cyprus nearing Monday deadline to seal EU bailout
* Without deal banks face collapse, possible euro zone exit
* President said to threaten resignation if pushed too far
By Annika Breidthardt and Jan Strupczewski
BRUSSELS, March 25 Cyprus reached an outline
deal with international lenders for a 10 billion euro ($13
billion) bailout that would shut down its second largest bank
and inflict heavy losses on uninsured depositors, an EU
spokesman said early on Monday.
The tentative deal emerged after fraught negotiations
between President Nicos Anastasiades and heads of the European
Union, the European Central Bank and the International Monetary
Fund - hours before a deadline to avert a collapse of the
The draft proposal, which still has to be approved by euro
zone finance ministers, would save the Mediterranean island from
financial meltdown by winding down Popular Bank of Cyprus
, also known as Laiki, and shifting deposits below
100,000 euros to the Bank of Cyprus to create a "good bank".
Deposits above 100,000 euros, which under EU law are not
guaranteed, would be frozen and used to resolve debts, and Laiki
would effectively be shuttered. The EU spokesman said no levy
would be imposed on any deposits in Cypriot banks.
A senior source involved in the talks said Anastasiades had
threatened to resign at one stage if he was pushed too far. A
first attempt at a deal collapsed last week when the Cypriot
parliament rejected a proposed levy on all deposits.
EU diplomats said the president, flown to Brussels in a
private jet chartered by the European Commission, had fought to
preserve the country's business model as an offshore financial
centre drawing huge sums from wealthy Russians and Britons.
The key issues in dispute were how Cyprus would raise 5.8
billion euros from its banking sector towards its own financial
rescue, and how to restructure the outsized banks.
The speaker of the Cypriot parliament, Yiannakis Omirou,
told reporters in Nicosia a bailout deal was "taking shape".
The EU's economic affairs chief Olli Rehn said earlier there
were no good options but "only hard choices left" for the latest
casualty of the euro zone crisis.
With banks closed for the last week, the Central Bank of
Cyprus imposed a 100-euros per day limit on withdrawals from
cash machines at the two biggest banks to avert a run.
French Finance Minister Pierre Moscovici rejected charges
that the EU had brought Cypriots to their knees, saying it was
the island's offshore business model that had failed.
"To all those who say that we are strangling an entire
people ... Cyprus is a casino economy that was on the brink of
bankruptcy," he told Canal Plus television.
The euro gained against the dollar in early Asian
trading. Analysts had said failure to clinch a deal could cause
a financial market selloff, but some said the island's small
size - it accounts for just 0.2 percent of the euro zone's
economic output - meant contagion would be limited.
The abandoned levy on bank deposits had unsettled investors
since it represented an unprecedented step in Europe's handling
of a debt crisis that has spread from Greece, to Ireland,
Portugal, Spain and Italy.
In the Cypriot capital, Nicosia, the mood was anxious.
"I haven't felt so uncertain about the future since I was 13
and Cyprus was invaded," said Dora Giorgali, 53, a nursery
teacher who lost her job two years ago when the school she
worked at closed down.
"I have two children studying abroad and I tell them not to
return to Cyprus. Imagine a mother saying that," she said in a
central Nicosia square. "I think a solution will be found
tonight but it won't be in the best interests of our country."
Cyprus's banking sector, with assets eight times the size of
its economy, has been crippled by exposure to crisis-hit Greece.
Without a deal by the end of Monday, the ECB said it would
cut off emergency funds to the banks, spelling certain collapse
and potentially pushing the country out of the euro.
Conservative leader Anastasiades, barely a month in office
and wrestling with Cyprus' worst crisis since a 1974 invasion by
Turkish forces split the island in two, was forced to back down
on his efforts to shield big account holders.
Anticipating a run when banks reopen on Tuesday, parliament
has given the government powers to impose capital controls.
About 200 Cypriot bank employees protested outside the
presidential palace on Sunday chanting "troika out of Cyprus"
and "Cyprus will not become a protectorate".
In a stunning vote on Tuesday, the 56-seat parliament
rejected a levy on depositors, big and small. Finance Minister
Michael Sarris then spent three fruitless days in Moscow trying
to win help from Russia, whose citizens and companies have
billions of euros at stake in Cypriot banks.
On Friday, lawmakers voted to nationalise pension funds and
split failing lenders into good and bad banks - the measure
likely to be applied to Laiki. The plan to tap pension funds was
shelved due to German opposition, a senior Cypriot official told
It was not immediately clear whether the revised bailout
plan would require parliamentary approval or whether the
government could try to bypass the assembly.
The tottering banks hold 68 billion euros in deposits,
including 38 billion in accounts of more than 100,000 euros -
enormous sums for an island of 1.1 million people which could
never sustain such a big financial system on its own.