Cyprus' fate is unclear after parliament rejects EU bailout

20/03/2013

The bailout deal fails to win a single vote in parliament.

By Cornelis van Zweeden for Southeast European Times -- 20/03/13

Cypriots demonstrate against an EU bailout deal outside the parliament in Nicosia on Tuesday (March 19th). [AFP]

The parliament's rejection of a 10 billion-euro bailout because it included a controversial levy on bank deposits sends Cyprus President Nicos Anastasiades back into negotiations with the EU.

Even as Anastasiades warned of the catastrophic consequences of rejecting the deal, including a "complete collapse of the banking sector" and a possible exit from the eurozone, not one member of parliament supported the proposal when it came up for vote on Tuesday (March 19th). Thirty-six members opposed the plan and 19 others abstained.

The European Central Bank declined to comment other than saying it was monitoring the situation.

The government agreed to the bailout on Saturday, sparking immediate protests and a run on banks by angry citizens who had been promised their deposits were fully guaranteed.

Cyprus sought a bailout of 15.8 billion euros, but EU finance ministers were only prepared to lend 10 billion euros. Germany insisted that the remainder be paid through a 6.75 percent tax on small deposits and a 9.9 percent tax on large accounts.

But even after the government shifted the proposed tax burden to owners of deposits of more than 100,000 euros, the plan remained unacceptable to parliament.

Zsollt Darvas at the Bruegel Institute, a Brussels-based think tank, said that the EU was right to insist on taxing depositors as part of a bailout-package. "Taxpayers should not foot the bill for private-sector losses," he told SETimes.

Darvas doubted there would have been serious fallout if Cyprus had accepted the tax on deposits. "Institutional investors would have understood that Cyprus is a unique case."

The demand for a haircut was driven largely by fatigue from five years of propping up faltering economies, including Spain, Italy, Portugal and Greece.

The next step for Cyprus remains unclear, as its economy would not survive if the European Central Bank cuts its lifeline to banks. The bank finances troubled banks in the eurozone at very low rates.

"If Cyprus leaves the eurozone there will be a big explosion in the eurozone," John Nomikos, who heads the Research Institute for European and American Studies in Athens, told SETimes.

Nomikos predicted a collapse of confidence for other Europeans. "People fear what might have happened in Cyprus could happen in any state," he said.

Other analysts played down the risk of contagion. "Cyprus will be considered a very special case and the confidence of deposit holders in other eurozone countries will not be affected," Ariën Bikker, spokesperson of ABN-AMRO, a Dutch bank, told SETimes.

None of the European institutions could be reached for comment. But Stavros Karkaletsis at the Hellenic Centre for European and International Analyses doubted the EU would act precipitously.

"Nobody believes the Germans are going to push Cyprus out of the eurozone," Karkaletsis told SETimes. "But the Germans will be very angry."

Media reports indicate that Finance Minister Michael Sarris is already in Russia negotiating with Moscow's government. Russia holds a large percentage of uninsured deposits in Cyprus and may be motivated to help bail out the economy. If the European Central Bank cuts the lifeline and Cyprus defaults, Russian depositors stand to lose roughly 14 billion euros, according to an analysis by Moody's, the US-based credit rating agency.

Some expressed concern that negotiating with Moscow could give Russia and its president, Vladimir Putin, more influence in Cypriot affairs.

"He can say 'I give you the 6 billion euros you need, but you have to give me access to your gas fields'," Karkaletsis said. "Putin can also buy one of the two big banks."

Correspondent Andy Dabilis in Athens contributed to this report.

This content was commissioned for SETimes.com.