Cyprus reworks divisive bank tax, delays vote

By Michele Kambas and Karolina Tagaris

NICOSIA | Mon Mar 18, 2013 3:56pm EDT

(Reuters) - Cypriot ministers scrambled to revise a plan to seize money from bank deposits before a parliamentary vote on Tuesday that will either secure the island's financial rescue or threaten its default.

The weekend announcement that Cyprus would impose a tax on bank accounts as part of a 10 billion euro ($13 billion) bailout by the European Union broke with previous practice that depositors' savings were sacrosanct. The euro and stock markets fell on concern the euro zone crisis was reigniting.

Before Tuesday's vote, which is too close to call and would send reverberations across the currency zone if lost, the government was working to soften the blow to smaller savers by tilting more of the tax towards those with deposits greater than 100,000 euros ($130,000).

The decision to target bank accounts stunned Cypriots, and police sealed off parliament in Nicosia as about 400 people staged a noisy protest outside, aggrieved that their small island of one million people should be singled out for such treatment.

Angry demonstrators honked horns and waved placards reading "Hang the Banksters, Hands off People's Savings" and "Merkel go home and stay".

Residents emptied cash machines over the weekend. The move also unnerved depositors in the euro zone's weaker economies and investors feared a precedent had been set that could reignite turmoil that the European Central Bank has calmed in recent months with its pledge to do whatever it takes to save the euro.

The government says Cyprus has no choice but to accept the bailout with the levy on deposits, or go bankrupt.

A Cypriot source told Reuters the introduction of a tax-free threshold for smaller bank deposits - maybe up to 20,000 euros - was under discussion but not yet agreed.

The parliamentary speaker said debate on the bank levy would be delayed until 12:00 p.m. EDT on Tuesday to buy more time to build consensus. Banks, shut on Monday for a bank holiday, will remain closed on Tuesday and Wednesday to avert any panic.

GOVERNMENT TO DECIDE

The euro zone has indicated that changes would be acceptable as long as the return of around six billion euros is maintained.

"It is up to the government alone to decide if it wants to change the structure," European Central Bank policymaker Joerg Asmussen, who was pivotal in the weekend negotiations, told reporters in Berlin.

"The important thing is that the financial contribution of 5.8 billion euros remains," he said.

Euro zone finance ministers will hold a teleconference at 1830 GMT on Monday.

On the streets of Nicosia, ordinary Cypriots blamed European leaders, especially German Chancellor Angela Merkel.

"We are hugely disappointed by our so-called European partners. They have hurt the credibility of the banking system and the country's dignity," said Andreas Evangelou, 52, who said savings to put his son through university would be taken.

"They are treating us like guinea pigs," said Takis Georgiou, 49. "The government has lost its credibility in the eyes of the people. We'd be better off leaving the euro and returning to the pound, we don't want to end up like Greece."

Protesters had inked the word "No" on the palms of their hands. "Europe is for its people and not for Germany," one placard said.

On markets, the euro fell before recovering some losses. European stocks dropped two percent before recouping most of the lost ground - denoting only modest levels of concern - with banks taking the heaviest blow.

"The most important question is what would happen the following day if the bill isn't voted," Cyprus central bank governor Panicos Demetriades told parliament.

"What would certainly happen is that our two big banks would need to be consolidated. This doesn't mean that they would be completely destroyed. We will aim for this to happen in a completely orderly way."

ONE-OFF MEASURE

Brussels has emphasized that the measure is a one-off for a country that accounts for just 0.2 percent of European output.

The worst fear is that savers in other, larger European countries become nervous and start withdrawing funds, although there was no immediate sign of that on Monday.

"If I were a saver, certainly in Spain or maybe Italy, I think I'd be looking askance at these measures and think this could yet happen to me," said Peter Dixon, global financial economist at Commerzbank.

Cyprus's banking sector, which attracts money from Russians, dwarfs the size of its economy and has been severely hurt by exposure to its much larger neighbor Greece.

Moscow is considering extending an existing 2.5 billion euro loan to help bail the island out and said the fact it had not been consulted about the bailout could come into play.

"We will consider the issue of restructuring of the loan taking into account our (future) participation in the coordinated actions with the European Union to help Cyprus," Russian Finance Minister Anton Siluanov told Reuters.

PUTIN ANGRY

President Vladimir Putin criticized the bank levy as setting a dangerous precedent.

"Putin said that such a decision, should it be made, would be unfair, unprofessional and dangerous," Kremlin spokesman Dmitry Peskov told reporters.

In Serbia, where many saw Cyprus as a haven for money during the rule of Slobodan Milosevic, some with accounts there showed signs of concern.

A Belgrade physician, who gave his name as Nebojsa, said he had 270,000 euros in a Cyprus account. He refused to identify himself as Serbs are not allowed to keep bank accounts abroad.

"I will go (to Cyprus) this week to collect money from a friend who is authorized to take care of my savings there," Nebojsa said. "He had already emptied my account as soon as rumors about the new tax started. I will stash my money it somewhere, I will probably get a safe deposit box."

Approval in Cyprus's 56-member parliament is far from a given: no party has an absolute majority and three parties say outright they will not back the tax.

A source close to the consultations told Reuters authorities were hoping to cut the tax to 3.0 percent from 6.7 percent for deposits under 100,000 euros.

Even that effectively rips up the protection savers thought they enjoyed on insured deposits up to that limit. The rate for deposits above that would then be jacked up to 12.5 percent from 9.9 percent.

Cypriot President Nicos Anastasiades, a conservative elected just three weeks ago, said in a TV address that the tax was an alternative to a disorderly bankruptcy. It was painful, but "will eventually stabilize the economy and lead it to recovery".

Savers who lost money would be compensated by shares in commercial banks, with equity returns guaranteed by future revenues expected from natural gas discoveries, Anastasiades said. But many legislators remain unconvinced.

"Essentially parliament is called to legalize a decision to rob depositors blind, against every written and unwritten law," said Yiannakis Omirou, speaker of parliament and head of EDEK, the small Socialist party. "We refuse to subscribe to this." ($1 = 0.7654 euros)

(Additional reporting by Annika Breidthardt, Jan Strupczewski, John O'Donnell, Aleksandar Vasovic and Reuters Moscow Bureau; Writing by Mike Peacock; Editing by Janet McBride and Giles Elgood)