Cyprus lawmakers reject bank tax; bailout in disarray

NICOSIA Tue Mar 19, 2013 11:05pm GMT

1 of 11. Anti-bailout protesters raise their open palms showing the word 'No' after Cyprus's parliament rejected a proposed levy on bank deposits in Nicosia March 19, 2013.

Credit: Reuters/Yorgos Karahalis

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NICOSIA (Reuters) - Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout on Tuesday, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray.

The vote in the tiny legislature was a stunning setback for the 17-nation currency bloc, angering European partners and raising fears the crisis could spread; lawmakers in Greece, Portugal, Ireland, Spain and Italy have all accepted austerity measures over the last three years to secure European aid.

With hundreds of demonstrators outside the parliament chanting "They're drinking our blood", the ruling party abstained and 36 other lawmakers voted unanimously to reject the bill, bringing the Mediterranean island, one of the smallest European states, to the brink of financial meltdown.

Finance Minister Michael Sarris had already headed to Moscow, amid speculation Russia could offer assistance given the high level of Russian deposits in Cypriot banks. President Nicos Anastasiades, barely a month in office, spoke by phone with Russian President Vladimir Putin after the vote.

Anastasiades was due to meet party leaders at 9 a.m. (0700 GMT) on Wednesday to explore a way forward.

"The voice of the people was heard," 65-year-old pensioner Andreas Miltiadou said among a crowd of demonstrators jubilant after the vote.

EU countries had warned they would withhold 10 billion euros (8.6 billion pounds) in bailout loans unless depositors in Cyprus, including small savers, shared the cost of the rescue, an unprecedented step in the stubborn debt crisis.

The European Central Bank had threatened to end emergency lending assistance for teetering Cypriot banks, which were hard hit by the financial crisis in neighbouring Greece.

The island's partners barely disguised their anger.

Euro zone paymaster Germany, facing an election this year and increasingly frustrated with the mounting cost of bailing out its southern partners, said Cyprus had no one to blame but itself for the gravity of the situation.


"Cyprus requested an aid programme," German Finance Minister Wolfgang Schaeuble told ZDF television. "For an aid programme we need a calculable way for Cyprus to be able to return to the financial markets. For that, Cyprus's debts are too high."

Dutch Finance Minister Jeroen Dijsselbloem, who chairs the Eurogroup of finance ministers, said the bailout offer still stood providing the conditions were met. European Central Bank Governing Council member Ewald Nowotny called on Cyprus to show "discipline and the readiness to act rationally."

But it was Europe's demand at the weekend that Cyprus break with previous EU practice and impose a levy on bank accounts that led outraged Cypriots to empty bank cash machines and unsettled financial markets.

An important issue in negotiations has been the high level of deposits held in the island's banks by non-EU citizens and companies, notably from Russia, where Cyprus has established itself as a major provider of offshore financial services.


The EU and International Monetary Fund are demanding Cyprus raise 5.8 billion euros from bank depositors to secure the bailout it needs to rescue its financial sector. They say a bailout of more than 10 billion euros would tip Cyprus's debt level into unmanageable territory for its 1.1 million people.

But lawmakers said the levy on deposits crossed a red line.

"You can't take a 10,000-metre jump without a parachute. And that's what they're asking of us," said George Perdikis of the Greens Party.

International market reaction has been muted so far but that might change.

While Brussels has emphasised 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.

Dijsselbloem, the Eurogroup chair, said there would be no need to impose a levy in any of the 16 other euro countries.

Some Cypriots hope they can get aid from Russia, which has bailed out Cyprus in the past. Many Russians keep their money in Cyprus and operate businesses from there.

Russian authorities have denied 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.

Banks in Cyprus are to remain shut on Wednesday to avoid a bank run. The island's stock exchange will also be closed on Wednesday. ($1 = 0.7760 euros)

(Additional reporting by Lionel Laurent, Noah Barkin, Gilbert Kreijger, Adrian Croft, Steven C. Johnson and Robin Emmott and Michael Shields; Writing by Paul Taylor/Mike Peacock/Matt Robinson; Editing by Giles Elgood)

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Comments (10)
Stu255 wrote:
The situation is completely ridiculous and offensive.

If the banks are insolvent then BONDHOLDERS should be on the hook for 100% of any losses before a single cent of deposits are ever at risk.

In what mutant and broken system do you circumvent BONDHOLDERS and go straight to depositors??

I will tell you… In the EU system, where the BONDHOLDERS are the big German banks. Well those BONDHOLDERS bought those BONDS and they must bear the losses.

You cannot change the rules of the system because it’s in German interests.

Cyprus should DEFAULT and pass 100% of the €17bn loses straight to the German banks who bought the bonds.

Never ever ever touch deposits. Not whilst there is 1 cent of outstanding BONDS on which to default.

They have crossed the Rubicon by showing their desire to change the rules of the entire system on a case by case basis to favour Germany.

Europe is tearing apart now, and Germany is once again in the firing line.

The blowback of this decision on the next crisis will be continental bank runs, deposits are now in-play, and ultimately someone is going to default.

Mar 18, 2013 12:39am GMT  --  Report as abuse
Phil999 wrote:
This is interesting news. If the proposal is subject to a veto, and a consequent ‘no’ vote, it begs the question whether the EU has done some behind the scenes negotiating having now realised the folly of its bullying and the repercussions that will probably develop in the markets. A lot of respected commentators in Europe, America and elsewhere in the world have been outspoken in criticising the plan as very dangerous. Good for tiny Cyprus if it can stand up and support its citizens agains the eurocrats. Any government worth its salt should put fair play for citizens as a priority. Governments do represent the electorate after all. Cyprus could do us all a favour and will be financially supported by the EU if the vote is ‘no’ in any event.

Mar 19, 2013 7:42am GMT  --  Report as abuse
EssexInvestor wrote:
I thought it highly significant last evening when BBC broadcast an interview with a German (MP?) who stated clearly that German tax payers would not pay for Eurozone member states deficits unless… The “unless” seemed to amount to a demand they become more like Germany and surrender their budget to the EU, which really means Germany.

This approach now openly stated shows the Euro is not a common curency at all but a system iof fixed exchange rates using a proxy for the separate currencies. The sooner Germany leaves the Euro the better.

The sooner the enthusiasts for integration, in the EU, Britain and the US, all realise it cannot ever be accepted by the peoples, the better. For any US readers just ponder how anti-democratic the EU has always been and remains now. Your federal government is still pushing for deeper political integration – why do they want to encourage an opponent in Europe, because most committed EU integrationists are hostile to the US and freedom.

Mar 19, 2013 8:29am GMT  --  Report as abuse
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