Cyprus’s parliament rejected an unprecedented levy on bank deposits, dealing a blow to European plans to force depositors to shoulder part of the country’s rescue in a standoff that risks renewed tumult in the euro area.
Protestors cheered outside the parliament in the Cypriot capital, Nicosia, as lawmakers voted 36 against to none in favor of the proposal. There were 19 abstentions. Hammered out by euro-area finance chiefs last weekend, the deal sought to raise 5.8 billion euros ($7.5 billion) by drawing funds from Cyprus bank accounts in return for 10 billion euros in external aid.
“This is not a good result, neither for Cyprus nor for the eurozone, and we have to look together for alternatives to the negotiated package,” Luxembourg Finance Minister Luc Frieden said in a phone interview. Another meeting of the 17 euro-area finance chiefs is needed to discuss “next steps” with Cyprus’s government. “What matters now is to undertake all necessary measures to ensure the stability of the eurozone,” he said.
Stocks dropped and the euro fell to a three-month low against the dollar at the prospect of impasse in Cyprus. While the Mediterranean island nation accounts for less than half a percent of the euro economy, the fight over the bank tax risks triggering new turmoil in the financial crisis that began in 2009 in Greece.
While he “regrets” the result of the parliamentary vote, Cyprus is a “unique case” and sets no precedent for deposits elsewhere, German Finance Minister Wolfgang Schaeuble said in a statement. “We’ve taken adequate precautions to ensure that today’s decision in Cyprus will have no negative effect on the rest of the euro zone,” he said. The offer made by the group of finance ministers “remains on the table,” he said.
Dutch Finance Minister Jeroen Dijsselbloem, who chairs the meetings of finance ministers, echoed those comments, saying in a text message that the euro group “stands ready to assist Cyprus in its reform efforts.”
Cypriot President Nicos Anastasiades, who said the plan’s alternative would be the “indescribable misery” of a collapse in his country’s banking sector, is due to meet with political party leaders in Nicosia at 9 a.m. tomorrow, his office said before the vote. Cyprus’s banks and stock exchange will remain closed at least through tomorrow.
‘No Third Way’
The deposit levy, championed by Germany and pulled together in a 10-hour negotiation session over the weekend in Brussels, drew worldwide criticism that it broke a taboo over the safety of bank-deposit savings and risked launching a bank run in other European countries. Cypriots awoke March 16 to find bank transfers blocked, prompting images of long lines at ATMs.
“It seems at this moment there is no third way,” Averof Neophytou, vice-president of Anastasiades’s Disy party, told the chamber before the vote in which his party abstained. “But we must try to find a different path.”
Outside, the parliament was surrounded by demonstrators singing the national anthem and chanting “this will not pass.” The crowd roared their approval when the results of the vote came through. Euro-area finance chiefs urged Cyprus yesterday to spare small-scale savers, as they maintained the size of their total demand on account holders.
Anastasiades spoke by phone with Merkel today for the second time in as many days, German government chief spokesman Steffen Seibert said in a text message, declining to give details of the conversation. Seibert didn’t respond to messages seeking comment on the vote.
‘Not the End’
“This is not the end of the process, but instead kicks off a further round of negotiation with Moscow and Berlin,” Alexander White, a European political analyst at JPMorgan Chase & Co. in London, said in a note. “The Cypriot authorities wanted to conduct the vote so that they could reaffirm the extent of their difficulties to the Europeans.”
Cypriot Finance Minister Michael Sarris missed the ballot as he flew to Moscow to hold talks about financial assistance. Russian companies and individuals have $31 billion of deposits in Cyprus, according to Moody’s. Russian President Vladimir Putin called the tax “unfair, unprofessional and dangerous,” according to a statement posted on the Kremlin website.
European policy makers would consider ramping up pressure on Cyprus in the event of a breakdown over the deposit tax, a European official who asked not to be named said earlier today. Among the potential measures is cutting off funds to the nation’s banks through the European Central Bank’s Emergency Liquidity Assistance program.
The ECB said in a statement that it “takes note” of the Cypriot parliament’s decision and is in contact with its partners from the so-called troika, which includes the International Monetary Fund and the European Commission. “The ECB reaffirms its commitment to provide liquidity as needed within the existing rules,” the central bank said.
German coalition lawmakers said that Cyprus can expect no aid without meeting the bailout terms laid down.
“Cyprus has rebuffed the outstretched hand” of its partners, Hans Michelbach, a German lawmaker from Chancellor Angela Merkel’s Christian Democratic bloc and its ranking member on parliament’s finance committee, said in an e-mailed statement. The vote is “an act of collective unreason” and “the people of Cyprus must now pay a high price.”
The euro pared earlier declines and was down 0.1 percent at $1.2871 as of 10:29 p.m. in Frankfurt. The Stoxx Europe 600 Index declined 0.4 percent, the third straight drop. Spanish 10-year bonds fell for a fifth day, with the yield climbing 8 basis points to 5.03 percent.
Market tension was compounded in the hours before the vote amid reports that Cyprus’s finance minister Sarris had handed in his resignation. Sarris denied the speculation.
“No truth at all,” Sarris said in a text message. “Bad rumors at a difficult time.”