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Cyprus' new finance minister Haris Georgiades, second from left, in a meeting ahead of the country's bailout.
Cyprus' new finance minister Haris Georgiades, second from left, in a meeting ahead of the country's bailout. Photograph: Petros Giannakouris/AP
Cyprus' new finance minister Haris Georgiades, second from left, in a meeting ahead of the country's bailout. Photograph: Petros Giannakouris/AP

IMF sets terms of Cyprus bailout

This article is more than 10 years old
International Monetary Fund managing director Christine Lagarde said Cyprus must press ahead with measures to bring the island's budget into surplus by 2018

The International Monetary Fund has demanded that Cyprus cut state pension costs and reform its welfare system as the price of a €1bn (£854m) loan to help bail out the stricken island.

The IMF's managing director, Christine Lagarde, said the poorest Cypriots would be protected from the worst of the cuts, but Cyprus must press ahead with measures to bring its annual state budget into surplus by 2018.

The deal, agreed in principle by the Cypriot government, provoked an immediate reaction from trade unions, which called on bank workers to strike over potential pension cuts. Officials from the Cyprus Union of Bank Employees called on bank staff in Nicosia to walk off their jobs at lunchtime on Thursday, and gather in a protest march towards the parliament.

Underlining the sense of panic, the Cypriot central bank was reportedly preparing to extend capital controls to prevent a run on the banks despite previously lifting some more draconian elements earlier in the week.

The statement by Lagarde followed confirmation that the IMF will provide one-tenth of a €10bn bailout loan, leaving the European Union and the European Central Bank to pick up the remaining €9bn tab.

Cyprus needs the money to refinance its stricken banking sector and reduce government debts that were on course to reach 180% of GDP. The crisis brought Cyprus to the brink of collapse after it was in effect locked out of private markets and forced to seek funds from the EU and IMF. The Cypriot president, Nicos Anastasiades, has struggled to bring the situation under control after a series of mishaps that included imposing a tax on bank deposits of less than €100,000 – protected under EU guarantees – which was later reversed.

The three-year IMF loan was secured against a series of reforms agreed by the government two weeks ago that involved shutting the island's second largest bank, Laiki, and restructuring the biggest lender, Bank of Cyprus. A tax on bank deposits of more than €100,000 was also put in place to raise €5.8bn from domestic funds, amid reports that the haircut could be between 40% and 80% of deposits.

In addition, public sector cuts and tax rises already under way are estimated to save around 5% of GDP. The IMF said further measures amounting to an additional 2% of GDP will be needed by raising the corporate income tax rate from 10% to 12.5% and the tax rate on interest income from 15% to 30%. Cuts in pensions and welfare benefits will bring savings worth another 4.5% of GDP in the medium term "to achieve a 4% of GDP primary surplus by 2018, which is required to put debt on a firmly downward path".

It said the social welfare system will be reviewed to "streamline administration costs", minimise the overlap of existing programs, and improve their targeting to ensure that public resources "reach those in need".

Lagarde said: "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."

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