Cyprus will receive €1 billion from the International Monetary Fund as part of the €10 billion rescue package it agreed late in March with euro zone finance ministers that prevented the meltdown of the island's banking sector and its exit from the euro.

IMF managing director Christine Lagarde said the fund would support Cyprus through a three-year loan that aims to help Nicosia consolidate its finances 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 and the European Central Bank, " said Ms Lagarde.

“A combined financing package of €10 billion 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,” she added.

The EU-IMF troika of international lenders wants Cyprus to downsize its banking sector, continue fiscal consolidation efforts through spending cuts and implement deep structural changes to improve competitiveness.

As part of the EU-IMF plan, Laiki Bank, the island's second largest, will be shut, while Bank of Cyprus, the biggest lender, will be restructured. Depositors with more than €100,000 in the Bank of Cyprus could lose up to 60 per cent of their funds.

Since the bailout was announced Cyprus has become the first euro zone member to apply capital controls, with limits on credit card transactions, withdrawals, money transfers abroad and cashing cheques.

Rescue agreement
The move aims to stem

outflow from the country. Ahead of the rescue agreement there was a steady flight of deposits, exacerbated in the last couple of months after reports about plans to tax depositors’ savings.

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

However, the island also suffered predominantly from exposure to the domestic property market which was hit by a sharp fall in demand.

International lenders said they were targeting a reduction in banking so it achieved an average euro zone size of 300 per cent of GDP by 2018.

Ms Lagarde said the rescue package would require great efforts from the Cypriot population, as the centre-right government of president Nicos Anastasiades will be forced to push through painful changes to meet the loan's conditions.

“We believe that it provides a durable and fully financed solution to the underlying problems facing Cyprus and provides a sustainable path toward a recovery,” said Ms Lagarde.

“The fiscal and financial policies of the programme seek to . . . protect the most vulnerable groups,” she added.

This comes a day after the resignation of Michalis Sarris, Cypriot finance minister.
– Copyright The Financial Times Limited 2013