Cyprus
lawmakers reject bank tax; bailout in disarray
Cyprus's
parliament overwhelmingly rejected a proposed levy on bank deposits
as a condition for a European bailout on Tuesday, throwing euro zone
efforts to rescue the latest casualty of the currency area's debt
crisis into disarray.
19
March, 2013
The
vote by the small state's legislature was a stunning setback for the
17-nation euro zone, after lawmakers in Greece, Portugal, Ireland,
Spain and Italy had repeatedly accepted unpopular austerity measures
over the last three years to secure European aid.
The
rejection, with 36 votes against, 19 abstentions and one absence,
brought the east Mediterranean island, one of the smallest European
states, to the brink of financial meltdown.
EU
countries said before the vote that they would withhold 10 billion
euros ($12.89 billion) in bailout loans unless depositors in Cyprus
shared the cost of the rescue, and the European Central Bank has
threatened to end emergency lending assistance for teetering Cypriot
banks.
But
jubilant crowds outside parliament broke into applause, chanting:
"Cyprus belongs to its people."
"The
voice of the people was heard," said Andreas Miltiadou, a
65-year-old pensioner among the demonstrators.
Newly
elected President Nicos Anastasiades earlier told reporters he
expected parliament to reject the tax on bank deposits, "Because
they feel and they think that it is unjust and it's against the
interests of Cyprus at large."
Europe's
demand at the weekend that Cyprus break with previous EU practice and
impose a levy on bank accounts sparked outrage among Cypriots and
unsettled financial markets.
Anastasiades
refused to accept a levy of more than 10 percent on deposits above
100,000 euros, which meant taxing smaller accounts too. That would
have hurt ordinary savers with deposits that they thought came with a
state guarantee.
Cypriot
Finance Minister Michael Sarris flew to Moscow on Tuesday to seek
Russian financial assistance. He denied by text message reports that
he had resigned, which rattled nerves as lawmakers were poised to
vote.
BACKLASH
Stunned
by the backlash, euro zone finance ministers urged Nicosia on Monday
to avoid hitting accounts below 100,000 euros, and instead increase
the levy on big accounts, which are unprotected by the state deposit
guarantee.
The
European Union and International Monetary Fund are demanding Cyprus
raise 5.8 billion euros from depositors to secure its bailout, needed
to rescue its financial sector.
A
revised draft bill would have exempt savings under 20,000 euros from
the planned 6.75 percent levy on deposits of less than 100,000 euros,
leaving a shortfall, but that was not enough to sway lawmakers, even
in the ruling party, to accept the tax.
French
Finance Minister Pierre Moscovici said the euro zone could not lend
Cyprus any more, since the country's debt would become unmanageable.
"Above
10 billion euros we are entering into a size of debt that is not
sustainable," Moscovici told reporters in Paris.
International
market reaction has been muted so far but that might change.
"In
the very short term, this will be a small victory for the more
rational observers who had looked at this move as, frankly,
outrageous. But it leaves Pandora's Box wide open," said Mike
Moran, senior currency strategist at Standard Chartered in New York.
While
Brussels has emphasized that the measure was a one-off for a country
that accounts for just 0.2 percent of European output, fears have
grown that savers in other, larger European countries might be
spurred to withdraw funds.
Dutch
Finance Minister Jeroen Dijsselbloem, who chairs the group of euro
zone finance ministers, said there would be no need to impose a levy
in other euro countries.
Deutsche
Bank Chief Executive Anshu Jain told a Bundesbank conference in
Frankfurt. "We see near term contagion risk as limited. This is
unlikely to be a model for other European Union states."
CASH
FROM PUTIN?
Anastasiades
has continued to resist raising the levy on big deposits - many held
by foreigners including rich Russians - fearing for the island's
banking business model and reputation as a safe offshore financial
haven.
He
asked the EU for more aid during a telephone conversation with German
Chancellor Angela Merkel on Monday.
Some
Cypriots hope they could instead get aid from Russia, which has
bailed out Cyprus in the past. Many Russians keep their money in
Cyprus and operate businesses from there.
Government
spokesman Christos Stylianides said Anastasiades might also speak to
President Vladimir Putin, who had described the deposit levy as
"unfair, unprofessional and dangerous."
Russian
authorities have denied rumours that the Kremlin might offer more
money, possibly in return for a future stake in Cyprus's large but as
yet undeveloped offshore gas reserves, which have raised the island's
strategic importance.
An
influx of Russian money and influence since the collapse of the
Soviet Union has led some Brussels officials to complain privately
that Cyprus acts at times as a "Trojan donkey" for Moscow
inside the European Union since it joined in 2004.
Stunned
Cypriots emptied cash machines over the weekend and banks are to
remain shut on Tuesday and Wednesday to avoid a bank run. The
island's stock exchange also suspended trading for another two days.
($1 = 0.7760 euros)
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