After months of haggling over the details, Cyprus announced on Friday that it had struck a deal with the EU and IMF to bail out its once vibrant but increasingly flagging economy, making it the fourth EU state to apply for a rescue programme since the eruption of Europe's debt crisis.

Hours after a government spokesman announced the step, international creditors confirmed that headway had been made, although they stopped short of confirming an agreement had been sealed.

The island's finance minister, Vassos Shiarly, earlier estimated the financial assistance could be up to €17.5bn – as much as its entire annual economic output – following the battering of Cypriot banks by their exposure to debt-crippled Greece. The final amount will depend on a forthcoming analysis of how much Nicosia will need to recapitalise its lenders.

"Discussions are expected to continue from respective headquarters with a view to making further progress toward a potential programme," creditors representing the EU, ECB and IMF said in a joint statement.

Acutely aware of the plight of Greece – whose unprecedented recession through endorsement of internationally-mandated austerity measures has been covered copiously by the Cypriot media – the bloc's easternmost member has argued doggedly with potential lenders over issues ranging from pension reforms to the privatisation of state-owned organisations.

The island's veteran communist president Demetris Christofias, who trained in Moscow, has publicly flirted with the idea of securing funds from Russia as an alternative despite Nicosia currently holding the EU's rotating presidency.

Well-placed insiders said the leader, whose five-year term runs out in February, was privately appalled when he learned this week that the bailout, originally set for some €10bn, would now amount to around €20,000 per capita for the former British colony's internationally recognised Greek-controlled south. "On hearing the amount he went ballistic," said one source. "He's got his legacy to think about."

Visiting Athens last month Christofias openly conceded that he did not want Cyprus to experience the same fate. "We've seen what has happened to you and we don't want [to suffer] the same," he told reporters.

Despite having come up with a package of €13.5bn of austerity cuts and now heading for a sixth year of recession, the Greek government has been kept waiting for a promised tranche of aid worth up to €44bn, with eurzone policymakers this week yet again deferring a decision, now set for a finance ministers meeting on Monday.

In the island's war-divided capital, the government spokesman Stefanos Stefanou admitted the aid would come at a price, insisting that the government had tried strenuously to avoid being admitted into the financial assistance programme. Leaked documents have indicated that as in Greece creditors known collectively as "the troika" will demand the government drastically pares back the public sector as part of savings worth €1bn between 2012 and 2015.

"The bailout deal includes unpleasant measures," said Stefanou, refusing to elaborate on what the policies would be. "We negotiated very hard … to achieve the best conditions because from the moment a country goes into a stability mechanism things become very difficult and very hard. We tried as a government to avoid the mechanism, but unfortunately with the expiry of the deadline set by the European Central Bank for the recapitalisation of the banks we had to resort to the mechanism."

Within hours of the announcement, the government got a taste of the backlash life under the bailout will almost certainly bring, with the mass-market daily Politis running the headline "We have a memorandum and God help us".

Describing the measures that are likely to be meted out as tantamount to a "massacre", powerful trade unions instantly vowed to put up a fight in a country where workers' rights are held up as being even more sacred than in Greece.

"Whatever happens for us collective agreements and the right of collective negotiations in matters regarding workers' rights cannot be written off," said Babis Kyritsis, general secretary of the Pancyprian Federation of Labour, an umbrella organisation of unions. "In no circumstances will we abandon them."