Cyprus MPs reject EU-IMF bailout tax on bank depositors

Cyprus' parliament has rejected a controversial levy on bank deposits, proposed as part of an EU-IMF 10bn-euro (£8.7bn; $13bn) bailout package.

No MPs voted for the bill, with 36 voting against and 19 abstaining.

The finance ministry had modified the package, proposing an exemption for savers with smaller deposits, but opposition had remained fierce.

Thousands of protesters who had filled the streets outside parliament reacted with joy to the news of the vote.

EU finance ministers had previously warned that Cyprus' two biggest banks would collapse if the deal failed to go through in some form.

But after the vote the European Central Bank (ECB) moved quickly to announce it would continue to provide support for struggling Cypriot banks "as needed within the existing rules".

German Finance Minister Wolfgang Schauble said he "regretted" the vote and that Cypriots must understand ECB aid was contingent on a reform programme.

"There's a danger that they won't be able to open the banks again at all," he said. "Two big Cypriot banks are insolvent if there are no emergency funds from the European Central Bank."

The bailout deal, announced after 10 hours of talks on Saturday, prompted widespread outrage on the island at the prospect of ordinary savers being forced to pay a levy of 6.75%

The Cypriot finance ministry announced a change in the plan on Tuesday morning, to exempt savers with less than 20,000 euros (£17,000), while those over 100,000 euros would still be charged at 9.9%. However, this was not enough to placate critics.

The plan to tax bigger deposits at a higher rate has angered Russia, as Russian nationals hold many of those larger deposits.

Meanwhile, the UK ministry of defence said a plane carrying 1m euros had arrived in Cyprus as a contingency measure to provide military personnel and their families with emergency loans.

The money is to be used for British personnel and their families if cash machines and debit cards stop working.

Several MPs during the parliament debate on Tuesday evening denounced the proposed plan as "blackmail" and not a single lawmaker backed the deal.

The BBC's Mark Lowen in Nicosia said the vote had left the bailout in turmoil, sending a clear message to Brussels that the strategy needed a drastic rethink.

President Nicos Anastasiades had urged all parties to back the bailout, saying Cyprus would be bankrupt if the deal did not go ahead. However, he was aware that they were likely to reject the levy, regardless of the modifications.

"They feel and they think it's unjust and that it is against the interests of Cyprus at large. But I have to admit that it was something which was not expected by the troika and by our friends, the Eurogroup."

He has called an emergency meeting of political party leaders on Wednesday morning to discuss the way forward.

The president of the Eurogroup of eurozone finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, said he "took note" of the parliament's decision and that the Eurogroup stood "ready to assist Cyprus in its reform efforts".

Mr Dijsselbloem had earlier emphasised that no other eurozone country would be forced to impose such a levy.

The Cyprus central bank chief, Panicos Demetriades, warned that scrapping the tax on small savers would scupper the plan to raise 5.8bn euros in total from bank deposits. He also predicted account holders could suddenly withdraw 10% or more of the total in Cypriot banks if the levy was imposed.

Fearing a run on accounts, Cyprus has shut its banks until at least Thursday. The local stock exchange also remains closed.

Cyprus' banks were badly exposed to Greece, which has itself been the recipient of two huge bailouts.

Mr Demetriades said that he favoured imposing the levy only on deposits larger than 100,000 euros, with eurozone finance ministers also suggesting such a move.

Instead, they argue that wealthier savers should pay the levy at a higher rate - losing more than 15% of their investments, correspondents say.

Of the estimated 68bn euros in total held in Cypriot bank accounts about 40% belongs to foreigners - most of them thought to be Russians.

The government fears a higher levy on these larger deposits would prompt many large investors to withdraw from the island and would effectively destroy its financial sector.

Russia has also said it may reconsider the terms of a 2.5bn-euro loan it made to Cyprus in 2011, which was separate from the proposed eurozone bailout.

Cypriot Finance Minister Michalis Sarris arrived in Moscow on Tuesday to see if the repayment on that loan could be delayed until 2020, and whether the interest rate could be reduced. As his visit began, he denied rumours that he had submitted his resignation.

Officials said he would also be looking for "further investment" in his country, correspondents report, with some speculating this might mean Russian access to Cyprus' large undeveloped gas deposits.