May 16 (Bloomberg) -- The International Monetary Fund approved a 1 billion-euro ($1.3 billion) loan to Cyprus as part of a bailout plan with European countries while stressing the “substantial” risks surrounding the program.
“Challenges ahead are significant, including restoring credibility in the banking sector and reducing fiscal deficits and debt to sustainable levels,” IMF Managing Director Christine Lagarde, who chaired the fund’s board meeting, said in an e-mailed statement yesterday in Washington. “There is no room for implementation slippages.”
Cyprus became the fourth euro-zone country to tap IMF aid in Europe’s sovereign-debt crisis, which has entangled the finances of banks and nations in a mutually destructive spiral. Officials involved in the rescue have insisted that the plan, which taps Cypriot bank accounts to help plug the country’s financing needs, won’t set a precedent.
“The immediate priority is to stabilize the banking sector,” Lagarde said in the statement. “The authorities need to complete the bank recapitalization process, including by using public funds for solvent institutions where necessary” while “in parallel, decisive steps will be taken to restructure weak banks.”
After a tumultuous week in which an initial aid plan fell apart, European governments and the IMF agreed on March 25 to loan Cyprus 10 billion euros as long as the country liquidated its second-largest bank and forced losses on bank bondholders and deposits of more than 100,000 euros.
“The macroeconomic outlook is subject to high uncertainty and risks to the program are substantial,” Lagarde said. “Full and timely implementation of the program is critical to maintain credibility and achieve the program’s objectives.”
The Washington-based fund’s board of directors also agreed to immediately disburse 86 million euros to the Mediterranean island, it said in the statement.
Cyprus already received 2 billion euros on May 13 and may get as much as 1 billion euros more in June from the European Stability Mechanism, the euro area’s permanent backstop fund.
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