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Rejection of Deposit Tax Scuttles Deal on Bailout for Cyprus
« on: March 20, 2013, 14:41:27 PM »
Rejection of Deposit Tax Scuttles Deal on Bailout for Cyprus

Petros Giannakouris/Associated Press - Protesters outside the Cypriot parliament in Nicosia during the vote Tuesday on a bailout package.

Published: March 19, 2013

NICOSIA, Cyprus — Lawmakers rejected a 10 billion euro bailout package on Tuesday, sending the president back to the drawing board to devise a new plan that might still enable the country to receive a financial lifeline while avoiding a default that could reignite the euro crisis.

 The bailout package, which would have set an extraordinary precedent by taxing ordinary bank depositors to pay part of the bill, led to street protests in this tiny Mediterranean country and set off a wave of anxiety across Europe.

As hundreds of demonstrators gathered outside Parliament chanting antigovernment slogans, lawmakers voted 36 against with 19 abstaining, arguing that it would be unacceptable to take money from account holders. One member who was out of the country did not vote.

Protesters angry at what they saw as a dictate by Germany to enforce harsh bailout terms wielded unflattering posters of Chancellor Angela Merkel, a day after one climbed to the roof of German Embassy and threw down the German flag.

The German finance minister, Wolfgang Schäuble, said Germany “regretted” the vote in Cyprus, but insisted the public outcry “cannot lead us to make an irrational, unsustainable decision.” He said the euro zone as a whole was “very stable,” but cautioned that the situation in Cyprus should not be underestimated. “It is a very serious situation,” he said.

Analysts raised the possibility of a bank run in Cyprus and a cutoff of financing to Cypriot banks from the European Central Bank if the measure did not pass. It is still possible banks might not be able to open on Thursday, when a bank holiday is scheduled to end.

Michael Olympios, chairman of the Cyprus Investor Association, said Parliament’s rejection of the bailout deal “will buy us some time to see if we can come up with a better agreement.”

At issue was a plan for a one-time tax of 6.75 percent on deposits of less than 100,000 euros, or about $129,000 — even though deposits are guaranteed up to that amount in Cyprus and in most other European countries. President Nicos Anastasiades proposed an exemption for depositors with less than 20,000 euros, but that did not calm fears.

A 9.9 percent tax would be levied on Cyprus bank accounts with more than 100,000 euros — many of which contain Russian money that Germany has contended may be of questionable origin. The taxes were meant to raise 5.8 billion euros of the total bailout cost of 10 billion euros, or $13 billion.

Marios Karoyian, the head of the Democratic Party in Mr. Anastasiades’s coalition government, called the bailout terms an “attack” against Cyprus.

“The decision for a haircut is unethical and erodes the foundation of the E.U.,” he said, referring to the European Union. “We’re dealing with raw blackmail that could lead to the collapse of the euro zone.”

Averoff Neofytou, head of the governing Democratic Rally party, added: “We must admit that this will create an economic suicide. We are sending a message to Brussels, Berlin, Frankfurt and Washington: Don’t force us out of the euro.”

The failed vote intensified a showdown between the Cypriot government and its European partners. Mr. Anastasiades has accused them of pressing him to accept an unpalatable deal that hits ordinary savers and pensioners. Officials in Germany and at the International Monetary Fund say they did not tell Cyprus to tax insured deposits but that one way or another, the country must come up with the 5.8 billion euros to secure the bailout.

The managing director of the International Monetary Fund, Christine Lagarde, said earlier Tuesday that she was in favor of modifying the agreement to lower the burden on ordinary depositors.

“We are extremely supportive of the Cypriot intentions to introduce more progressive rates,” she said in Frankfurt.

She had urged leaders in Cyprus to quickly approve the plan reached by European leaders in Brussels last weekend, and complained that critics had not recognized the value of the agreement, in that it would force banks in Cyprus to restructure and become healthier.

Cypriot officials immediately reached for an alternative plan, which included testing whether Russia would be willing to help with a rescue.

Russian officials had reacted furiously to the proposed bank deposit tax, which they said had caught them by surprise, and they were hardly disappointed to see it shot down by the Cypriot Parliament. But it remained unclear on Tuesday night the extent to which Russia might be willing to provide assistance, which some analysts said might be the island’s last hope.

Cyprus officials made clear that they wanted the lines of communication with Moscow open. Soon after the vote in Parliament, Mr. Anastasiades called President Vladimir V. Putin of Russia to inform him of the results.

Mr. Putin’s spokesman, Dmitri S. Peskov, said that the Russian president had expressed concern about the possibility of any measures being adopted that could harm the interests of Russian citizens or businesses, according to the Interfax news agency. The two leaders agreed to stay in contact, and Mr. Putin invited Mr. Anastasiades to visit Moscow at any time.

Russian officials were preparing for talks in Moscow on Wednesday with the Cypriot finance minister, Michalis Sarris, who was expected to request that Russia postpone the maturity date on a 2.5 billion euro loan that it extended to Cyprus in 2011.

After the parliamentary vote, the European Central Bank indicated that it would not immediately cut off emergency cash — without which Cypriot banks probably could not survive. In a terse statement, the central bank said it was consulting with the International Monetary Fund and the European Commission, its partners in the so-called troika of international lenders.

But in a tacit warning that it would not provide assistance forever, the central bank said it would stick to rules that allow lending only to solvent banks. The Cyprus banks, while wobbly, are not yet insolvent.

“The E.C.B. reaffirms its commitment to provide liquidity as needed within the existing rules,” the central bank said.

Contributing reporting were David Herszenhorn from Moscow, Andreas Riris from Nicosia, James Kanter from Brussels, Jack Ewing from Frankfurt and Melissa Eddy from Berlin.

This article has been revised to reflect the following correction:

Correction: March 19, 2013

An earlier version of this article misstated the vote totals in Parliament. The vote was 36 against and 19 abstaining, not 36 against and 19 in favor.

This article has been revised to reflect the following correction:

Correction: March 20, 2013

An earlier version of this article misspelled the surname of president of Cyprus. He is Nicos Anastasiades, not Anastasiadis.