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Small savers spared in Cyprus deal

British expats with savings under £85,000 have been spared from being taxed by the Cypriot government in a last-minute EU deal.

But it means that any of the island's 60,000 British expats who break the threshold will be subjected to the compulsory one-off levy.

Cyprus was saved from a banking system collapse and bankruptcy in the early hours of Monday morning when eurozone ministers agreed a draft rescue package of £10 billion euro (£8.5 billion).

The UK Government has previously said it will only compensate British armed forces personnel left out of pocket.

Under the plan, Cyprus's second-largest bank, Laiki, will be restructured and holders of bank deposits of more than 100,000 euro (£85,000) will have to take losses, said Jeroen Dijsselbloem, who chaired the meeting of the 17-nation eurozone's finance ministers in Brussels.

British expats on the island had faced an anxious wait throughout the bailout negations this week after the Cypriot government pulled out of plans to tax every bank account in the country. Banks have been closed for more than a week with customers now only able to withdraw 100 euro (£85) a day.

The European Central Bank had threatened to cut off emergency assistance to the country's banks by Tuesday if no agreement was reached. Without a bailout deal, the country would have faced the prospect of bankruptcy, which could have forced it to become the first country to abandon the euro. The fact that this was avoided came as a relief to global stock markets, with the FTSE 100 Index up by 0.5% at one stage.

Alpari markets analyst Craig Erlam said: "The only other alternative was to default on its debt and exit the eurozone, which despite sounding like a great idea to many, would have probably resulted in the collapse of the country's banking sector, leaving it in an even worse recession than it is going to find itself in."

However, as there is still a levy on all deposits above 100,000 euro, analysts have questioned whether the country will be able to prevent a run on the banks. Unlike the previous rescues for Greece, Portugal, Ireland, and Spanish banks, the proposed Cypriot bailout is the first one that dips into people's bank accounts to finance a bailout. Under the original agreement, which was rejected by the Cypriot parliament, the government proposed a one-time tax of 6.75% on all bank deposits under 100,000 euro and 9.9% over that amount.

IMF managing director Christine Lagarde said the agreement provided a "comprehensive and credible plan" to deal with the country's problems. "The plan focuses on dealing with the two problem banks and fully protecting insured deposits in all banks. It addresses upfront the core problem of the banking system through a clear strategy that ensures debt sustainability and does not excessively burden the Cypriot taxpayer. This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth."