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Cyprus To OK Austerity In Exchange For Bailout

Cyprus is set to become the fifth EU nation to get a bailout from the EU and the International Monetary Fund. The loan would be equal to the island-nation's GDP.

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AUDIE CORNISH, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.

After months of negotiations, the leaders of the small island-nation of Cyprus said today that they will agree to austerity measures. In exchange, they will get bailout loans from the European Union and the International Monetary Fund. It is the fifth eurozone nation to ask for some kind of loan assistance. As Joanna Kakissis reports, when the Greek economy collapsed, it took Cyprus down with it.

JOANNA KAKISSIS, BYLINE: Cyprus has been divided since a war with Turkey in 1974. The northern part is dependent on Turkey and is far less affected by the euro debt crisis. The sovereign part is in the South and is run by Greek-speaking Cypriots. The nation entered the eurozone in 2008 and has close ties to Greece, says Fiona Mullen, an economist in the Cypriot capital, Nicosia.

FIONA MULLEN: If you like, it's an accident of geography. When the Cypriot banks decided to expand, where was the first place they looked to? It was Greece.

KAKISSIS: Cypriot banks invested heavily in Greek government bonds. The banks lost up to 75 percent on returns when those bonds were swapped earlier this year for ones with far lower interest rates. The country's second-largest bank, Cyprus Popular Bank, was especially hard hit, Mullen says.

MULLEN: So all of a sudden, you had Cyprus Popular Bank with essentially no capital and the only way to get out of that was for a government bailout. But the government didn't have enough money, so the government has had to go to the troika.

KAKISSIS: The troika refers to eurozone and IMF lenders, and it's a dirty word in Southern Europe. It means the loans will come with painful wage and pension cuts and tax hikes. The tax rate has been a sticking point in bailout negotiations, says Costas Apostolides, an economist in Nicosia. Raising taxes, he says, might scare away foreign corporations.

COSTAS APOSTOLIDES: Corporation tax here is only 10 percent. That is why there are so many foreign companies here. Even income tax does not begin until quite a high salary, so 70 percent of the Cypriot population do not pay income tax.

KAKISSIS: The Cypriots know they have to tighten their belts. This restaurant owner isn't changing his menu but he say he's happy to live on milk, bread and Greek yogurt.

UNIDENTIFIED MAN: (Foreign language spoken)

KAKISSIS: Real estate manager Bambos Georgiou, a Londoner whose parents come from Cyprus, says the Cypriots believe they'll recover faster than the Greeks.

BAMBOS GEORGIOU: They still smile, everybody smiles. They are optimistic rather than pessimistic, even now.

KAKISSIS: How long that optimism lasts remains to be seen. The price tag on the bailout might not be known until a report on the country's banks in early December. Finance Minister Vassos Shiarly says the amount could top $22 billion, roughly the same as the country's GDP. For NPR News, I'm Joanna Kakissis in Athens. Transcript provided by NPR, Copyright NPR.

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