Cyprus agrees to new EU bailout deal

European shares rose while German government bonds fell early today following Cyprus agreeing to a last-ditch deal with lenders to bail out the debt-ridden island and avert a collapse of its banking system.

In the early hours today Cypriot policy-makers struck a deal with the EU, the European Central Bank and the International Monetary Fund to shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a €10-billion bailout.

Without the agreement the ECB said emergency funds to banks would have been cut off, leading to a meltdown of Cyprus's banking system that could have caused the collapse of  Cyprus's banking system.

The euro zone banking shares index rose 2.4 per cent, even as the price of German 10-year Bunds, which moved down as yields rose, fell marginally.

The Cyprus deal, however, is not like other peripheral euro zone country bailouts, which had protected bank deposits. Traders were expecting risk premiums that had been falling to rise again.

Early today, though, a sense of relief took over the market that the euro zone had managed to avert the latest crisis over the financial system of the region.

Europe's top shares were up 0.8 per cent, recovering most of the losses from their worst weekly performance since mid-November last week over concerns of the problems in Cyprus spreading to other struggling euro zone members.

Yields on debt in peripheral nations such as Italy and Spain, which tend to drop with improving economic outlook were slightly lower.

The deal, came after several hours of meetings and approved by the finance ministers from the euro zone, the 17 countries that use the common currency. The deal would see the size of Cyprus's banking sector pruned drastically, bloated with dollars from Russia and elsewhere in the former Soviet Union.

The deal would see the highly controversial idea of a tax on bank deposits scrapped, but depositors and bond holders would be required to take losses.

The Greek media quoted president Nicos Anastasiades as saying there had been a deal which was in the interests of the people of the country and the European Union.

According to the head of the finance ministers, Jeroen Dijsselbloem of the Netherlands, the agreement could ''be implemented without delay'' and would not need a new vote by the Cypriot Parliament, which had rejected a deal last week. Lawmakers on Friday passed legislation that set the framework for the new action, he said.

He added, this had indeed been an ardous week for Cyprus.