Cypriot ‘no’ to deposit tax creates new uncertainty

The Cypriot Parliament took the momentous decision on Tuesday to reject a proposal for a deposit tax that would secure the island a bailout from the eurozone and International Monetary Fund, triggering concern in Athens about the possible consequences.

There were 36 “no” votes and not a single “yes” vote in Tuesday night’s ballot as the 19 deputies of ruling Democratic Rally (DISY) abstained. One MP was absent. President Nicos Anastasiades had made it clear earlier that the deposit tax proposal would not pass through Parliament despite a change that foresaw no charge for savers with less than 20,000 euros in their accounts. P

arliament Speaker Yiannakis Omirou said lenders’ demands for a deposit tax to raise 5.8 billion euros so Cyprus could borrow another 10 billion from the troika was “blackmail.”

The rejection of the measure was popular with hundreds of protesters who had gathered outside the House of Representatives in Nicosia but left Cyprus in limbo. Finance Minister Michalis Sarris, who denied reports that he had offered his resignation, arrived in Russia for talks with officials there. Anastasiades also had a telephone conversation on Tuesday night with Russian President Vladimir Putin.

It is thought Cyprus will attempt to strike a deal with Moscow for the sale of troubled Popular Bank of Cyprus, known as Laiki, and possibly other local lenders.

It is likely the Russians will seek some form of compensation for such an investment. A naval port in Cyprus for the Russian fleet and access to the country’s natural gas reserves are among the rewards Moscow might seek.

Anastasiades is also thought to be examining the option of making use of social security funds’ reserves, which amount to 5 billion euros, and offering depositors with more than 100,000 euros a voluntary haircut in return for natural gas-indexed bonds.

There is concern that Cypriot banks, which are also due to be closed on Wednesday

in an extended bank holiday, could suffer severe deposit withdrawals when they reopen. The European Central Bank responded to Tuesday’s vote in Cyprus by saying it would continue to fund the island’s lenders as long as they comply with Emergency Liquidity Assistance requirements. The ECB said it “took note” of the vote and remained “committed to provide liquidity as needed within the existing rules.”

The latest developments on Cyprus were the main topic of discussion among Greece’s coalition leaders, who met on Tuesday evening for talks that were originally meant to focus on the return of the troika to Athens at the beginning of April.

Asked by reporters whether developments in Cyprus would have negative implications on Greece, Finance Minister Yannis Stournaras remarked that “Greece is totally fortified.” He dismissed speculation about a possible default by Cyprus. “Cyprus will not default. Where did you hear that?” he retorted to a journalist following talks with Prime Minister Antonis Samaras and the leaders of the two junior coalition partners. PASOK chief Evangelos Venizelos described the proposal as “a historic mistake” by the eurozone “which must be corrected as soon as possible as Cyprus must be protected. Side effects must be averted.” He said deposits at Cypriot banks based in Greece were safe, echoing Stournaras by insisting that “the Greek banking system is totally fortified.”

Fotis Kouvelis of Democratic Left struck a similar tone when questioned about the rejected tax proposal, noting that “the Europeans must revise their decision for Cyprus.” Unlike Stournaras, he did not rule out the possibility of Cyprus leaving the eurozone, a prospect that would have “serious repercussions,” he warned.

Government spokesman Simos Kedikoglou also expressed support for Nicosia, saying that Greece “supported and continues to support the decisions of Cyprus.”

Talks between Samaras and his coalition partners were dominated by developments in Cyprus. But, both Kouvelis and Venizelos confirmed, the matter of Greece’s commitments to foreign creditors were also discussed, particularly delayed plans for an overhaul of the civil service. Kouvelis rebuffed rumors of layoffs in the public sector.

The possible extension of a property tax introduced as an emergency levy in 2011 was not discussed during the meeting, Kouvelis said. Earlier on Tuesday, Stournaras said he was in favor of the levy’s extension “for reasons of realism.”

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