Cyprus Rejects Deposit Levy in Blow to European Bailout Plan

Searching for Plan B

By Patrick Donahue and Georgios Georgiou 

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.

Cypriot legislators in the capital Nicosia voted 36 against to none in favor of the proposal in a show of hands today. There were 19 abstentions. Hammered out by euro-area finance chiefs over the weekend, the deal had sought to raise 5.8 billion euros ($7.5 billion) by drawing funds from Cyprus bank accounts in return for 10 billion euros in international aid.

Stocks dropped and the euro fell to a three-month low against the dollar at the prospect of impasse in Cyprus. European officials including Dutch Finance Minister Jeroen Dijsselbloem had said that Cyprus must contribute to its own bailout, while stressing that the Cypriot situation is unique. German coalition lawmakers said that Cyprus can expect no aid without meeting the terms.

“Cyprus has rebuffed the outstretched hand” of its partners, Hans Michelbach, a German lawmaker from Chancellor Angela Merkel’s Christian Democratic bloc and the 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.”

Nicosia Talks

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.

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.

“There is no precedent for what would happen if Cyprus rejected the conditions,” Holger Schmieding, chief economist at Berenberg Bank inLondon, wrote in a note before the vote. “Our best guess is that Europe would give Cyprus a brief and final chance to rethink and vote again.”

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 before the vote. Among the potential measures is cutting off funds to the nation’s banks through the European Central Bank’s Emergency Liquidity Assistance program.

ECB Commitment

The ECB said it “takes note of the decision of the Cypriot Parliament and is in contact with its Troika partners” from the International Monetary Fund and the European Commission, according to a statement. “The ECB reaffirms its commitment to provide liquidity as needed within the existing rules.”

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 Anastasiade’s Disy party, told the chamber before the vote in which his party abstained. “But we must try to find a different path.”

Crowd Cheers

Outside, the parliament was surrounded by demonstrators singing the national anthem and chanting “this will not pass.” The crowd cheered when the results of the vote came through.

The euro declined 0.6 percent to $1.2878 as of 7:47 p.m. in Frankfurt. The Stoxx Europe 600 Index (SXXP) dropped 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, Michael Sarris, had handed in his resignation. Sarris, who is in Moscow to hold talks about financial assistance, denied the speculation.

“No truth at all,” Sarris said in a text message. “Bad rumors at a difficult time.”

Euro-area finance chiefs urged Cyprus yesterday to spare small-scale savers, as they maintained the size of their total demand on account holders.

There was no immediate comment from European Commission spokesman Simon O’Connor.

While the Mediterranean island nation accounts for less than half a percent of the 17-nation euro economy, the fight over the bank tax risks triggering new turmoil in the financial crisis that began in 2009 in Greece. French Finance Minister Pierre Moscovici said earlier today that the euro group didn’t have an alternative plan.

“I don’t think about plan Bs,” Moscovici said in Paris. “We’re in a plan A. Everyone has to assume his responsibilities.”