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Cyprus lawmakers reject tax on bank deposits as part of bailout

The government had agreed on the levy in exchange for $13 billion in international aid to keep its banks afloat.

March 19, 2013|By Anthee Carassava, Los Angeles Times
  • People protest against the bank deposit tax outside the Cypriot parliament in Nicosia.
People protest against the bank deposit tax outside the Cypriot parliament… (Petros Giannakouris, Associated…)

ATHENS — Lawmakers in Cyprus on Tuesday voted against a controversial economic bailout plan, threatening to cripple the island republic's banking sector and with it the economy

Not a single one of Cyprus' 56 lawmakers backed the proposal to levy taxes on some bank deposits in exchange for $13 billion in international aid to prop up the island's faltering banks. Thirty-six legislators opposed the measure, with 19 abstaining and one missing the vote.

The plan, announced over the weekend by European officials after marathon negotiations and later modified, was intended to raise about $7 billion on top of the aid from Europe and the International Monetary Fund. But faced with fierce public reaction, bank runs and global market grumblings, the lawmakers bolted, leaving European officials and Cypriot government policymakers scrambling to come up with an alternative.

Before the vote, the government had revised the plan to exempt deposits of up to $26,000 from the levy. Instead, Cypriots with savings of $26,000 to $130,000 would have been required to pay a one-time charge of 6.75%, and all savings above that amount would have been taxed at 9.9%.

Despite the concession to holders of smaller accounts, President Nicos Anastasiades failed to sway opposition politicians.

Thousands of angry Cypriots, meantime, took to the streets, waving placards and shouting "No" outside the legislature. The voting had been postponed twice since the weekend, sending streams of depositors to ATMs to empty their accounts and forcing the government to close the nation's three major banks until Thursday.

News of the rejection sparked scenes of jubilation, with British expatriates and Russians also joining in street parties.

The brushoff from lawmakers leaves Cyprus' bailout in question. Without external funds, the country's banks face imminent collapse, a fallout that looks certain to rattle markets and confidence in policymakers handling Europe's lingering economic crisis.

Speaking to reporters, Anastasiades said he planned to hold an emergency meeting of Cyprus' political leaders Wednesday to agree on what to do next. Fearing potential bank runs and capital outflow of as much as $30 billion, the government was considering keeping the major banks closed until Tuesday.

Absent from Tuesday's vote, Finance Minister Michalis Sarris was in Moscow investigating alternative funding, or what analysts have dubbed "Plan C": financial salvation from Russia, whose oligarchs have long favored Cypriot banks.

"If he plays the government's cards right," said Michalis Michail, a political analyst in Nicosia, the Cypriot capital, "Cyprus could convince Moscow to come to the island's rescue."

Russia last year gave Cyprus a $3.1-billion loan at a below-market interest rate to help keep Cyprus and its banks afloat.

Sarris was initially set to visit Moscow on Monday to try to stretch out the repayment terms of that deal, hoping also to solicit a new loan from the Kremlin. But after the government's surprise announcement of the levy on bank accounts — a move Russian President Vladimir Putin called "unjust, unprofessional and dangerous" — the meeting was pushed back. The proposed tax stoked anxiety among the island's estimated 30,000 Russian expatriates.

That left other observers questioning whether Russian help would be forthcoming.

"Cyprus used to bend over backwards to accommodate highflying Russian businessmen," said Fiona Mullen, a leading financial analyst in Nicosia. "Now it's being forced to take punitive action against them, and that has Moscow mad."

"If Sarris had a difficult job on his plate in trying to salvage the first loan deal on Monday, he's unlikely to make a major headway and get extra money from the Russia now on Tuesday," Mullen said.

Carassava is a special correspondent.

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