BRUSSELS—With just hours to spare, Cyprus reached a tentative deal with international lenders for a €10-billion ($13-billion) bailout that will shut down its second largest bank and inflict heavy losses on uninsured depositors, an EU spokesman said early Monday.

The outlines of the deal emerged after fraught negotiations Sunday night between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund — known as the “troika” — just hours before a deadline that would have seen the collapse of the country’s banking system.

The draft proposal, which must was approved soon after by the 17 eurozone finance ministers, would save the Mediterranean island from financial meltdown by winding down the Popular Bank of Cyprus, also known as Laiki, and shifting deposits below €100,000 to the Bank of Cyprus to create a “good bank.”

Deposits above €100,000, which under EU law are not guaranteed, would be frozen and used to resolve debts and Laiki would effectively be shuttered. The EU spokesman said no levy would be imposed on any deposits in Cypriot banks.

A senior source involved in the talks said that at one stage Anastasiades had threatened to resign if he was pushed too far. A first attempt collapsed last week when the Cypriot parliament rejected a proposed levy on all deposits. The latest plan will not need parliament’s approval.

EU diplomats said the president, flown to Brussels in a private jet chartered by the European Commission, had fought to preserve the country’s business model as an offshore financial centre drawing huge sums from wealthy Russians and Britons.

The key issues in dispute were how Cyprus would raise €5.8 billion from its banking sector towards its own financial rescue and how to restructure the outsized banks.

The tottering banks hold €68 billion in deposits, including €38 billion in accounts of more than €100,000 — enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own.

Earlier Sunday, the Central Bank of Cyprus imposed a €100 daily limit on withdrawals from ATMs at the country’s two biggest banks to prevent a run on the banks, which have been closed for a week.

News of the tentative deal saw the euro gain against the U.S. dollar in early Asian trading Monday. Analysts had warned that failure to clinch a deal could cause a financial market sell-off, though some pointed out that said the island’s small size — it accounts for just 0.2 per cent of the eurozone’s economic output — meant the contagion would be limited.

On Sunday, speaking on television, French Finance Minister Pierre Moscovici rejected charges that the EU had brought Cypriots to their knees, saying it was the island’s offshore business model that had failed.

“To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy,” he told Canal Plus television.

The initial attempt to impose a levy on bank deposits had left investors around the world unsettled since it represented an unprecedented step in Europe’s handling of a debt crisis that has spread from Greece to Ireland, Portugal, Spain and Italy.

In the Cypriot capital, Nicosia, the mood was anxious Sunday night as citizens waited for news from Brussels.

“I haven’t felt so uncertain about the future since I was 13 and Cyprus was invaded,” said Dora Giorgali, 53, a nursery teacher who lost her job two years ago.

“I have two children studying abroad and I tell them not to return to Cyprus. Imagine a mother saying that,” she said. “I think a solution will be found tonight but it won’t be in the best interests of our country.”

Without a deal by Monday, the ECB had warned it would cut off emergency funds to the Cypriot banks, spelling certain collapse and potentially pushing the country out of the euro.

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