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Cyprus postpones crucial vote on controversial bank deposit levy as stocks plummet around the world

John Hall, Charlotte McDonald-Gibson, Nathalie Savaricas

Monday, 18 March 2013

German and European bank officials have said Cyprus can amend the terms of its €10 billion (£8.5 billion) bailout.

Among those terms are the plans for a one-off bank deposit levy, which has caused a plunge in stocks around the world and sparked new fears of economic crisis in Europe.

A parliamentary vote on the controversial terms has been postponed until tomorrow evening.

As public anger on the island grew, Russia’s President Vladimir Putin this morning joined strong criticism of the move. “Putin said such a decision, if taken, would be unjust, unprofessional and dangerous,” a spokesman said in a meeting with economic advisers. Russian companies have an estimated £12.5 billion in the country.

And today Joerg Asmussen, a member of the European Central Bank’s governing council, said the exact terms of the bailout were still down to the Cyprus government.

He said: “It’s the Cyprus government’s adjustment programme. If Cyprus’ president wants to change something regarding the levy on bank deposits, that’s in his hands. He must just make sure that the financing is intact.

“The important thing is that the financial contribution of €5.8bn remains.”

The mooted levy was supposed to provide that contribution. Under the plan, people with up to €100,000 (£87,000) in Cypriot bank accounts would pay a 6.75 per cent levy, while those with more money would pay 9.9 per cent.

At its midday briefing, the ECB made no official comment.

And Steffen Seibert, a German government spokesman, said: “How the country makes its contribution, how it makes the payments, is up to the Cyprus government.”

After trading at a five year high of over 6500 in recent days, the FTSE 100 Index slumped this morning 100 points following the new President of Cyprus’ attempt to gather parliamentary support for the bailout.

Japan’s Nikkei ended the session more than 2.5% lower, while Germany’s DAX fell 1.2% to 7,944 and the CAC-40 in France was 1.% lower at 7,945. In London, banks were among the biggest fallers.

The levy was greeted with fury across Cyprus, with many expected to withdraw their savings from banks to avoid being hit by the tax.

Parliament had been due to vote on the bailout plan this afternoon, but according to Cypriot media, that vote has now been postponed. The postponement is believed to have come as the new President Nicos Anastasiades frantically tries to amend the plan to limit its impact on those with smaller savings.

If parliament eventually votes in favour of the plan, Cyprus will be eligible for a €10 billion (£8.5 billion) bailout from its partners in the eurozone and the International Monetary Fund.

Though Cyprus accounts for only around 0.2% of the combined output of the 17 European Union countries that use the euro, the tax on depositors has stoked fears of bank runs in other troubled European economies.

Since the European debt crisis began in late 2009, savers have been spared. In Cyprus there was anger that a better deal was not hammered out in Brussels on Friday. No other bailouts for struggling eurozone countries have put the burden so directly on citizens.

“The situation is unacceptable, they have fooled people. We’re being destroyed,” a woman outside a bank said. One Cypriot drove his digger to a bank and threatened to destroy it. “I’m protesting what they’re doing to our savings,” Christos Karandokis, the driver, told State television.

“In the medium term the decision taken regarding the loss on bank deposits could have major ramifications for the eurozone if the European debt crisis re-escalates,” said Gary Jenkins, managing director of Swordfish Research. “What I find most surprising is that they are prepared to take such a major gamble to save such a small amount of money.”

Russians have for years seen Cyprus as an investor-friendly jurisdiction with lax banking regulations and low taxes.

Cyprus’ banking sector is about eight times the size of the economy and has been accused of being a hub for money-laundering, particularly from Russia. That’s why many European officials wanted to have the banks’ depositors involved in the cost of the bailout.

And German finance minister Wolfgang Schaeuble yesterday said that an eventual no vote by Cypriot lawmakers would have huge repercussions in the country.

“Then the Cypriot banks will no longer be solvent, and Cyprus will be in a very difficult situation,” said Schaeuble, who insisted that every country involved in Europe’s debt crisis is different. In the case of Cyprus, he said bank owners and investors had to participate in the rescue.

“It can’t be done any other way if we want to avoid insolvency,” he said.

“If European policy makers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job,” said Michael Hewson, senior market analyst at CMC Markets.

In Asia, Japan’s Nikkei 225 index slid 2.7% to 12,220.63, while Hong Kong’s Hang Seng dropped 2% to 22,082.83.

Wall Street was headed for a retreat at the open too, with Dow futures down 0.5% and the broader S&P 500 futures 0.8% lower.

Oil prices were under pressure, with the benchmark New York rate 94 cents lower at $92.51 a barrel.

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