Cyprus and EU in awkward position as depositor tax is rejected

bankNicosia, Cyprus

The rejection by Cyprus’ parliament of an EU depositor tax on Tuesday places Cyprus’ bailout rescue plan in doubt and raises fresh concerns for Brussels as it scrambles to deal with the fallout of a defiant euro member nation that is unwilling to play by its rules.

During Tuesday’s parliament vote there were 36 parliament members who rejected the tax proposal while 19 members from President Anastasiades’ Democratic Rally party abstained from voting.

There was not one vote in favor of the controversial tax proposal.

The original depositor tax proposal that surfaced from Brussels last Friday consisted of a new unprecedented tax on bank depositors to help fund €10 billion ($13 billion) in bailout rescue money.

The one off tax consisted of 6.75 percent on all bank deposits under €100,000 and 9.9 percent over that amount to raise €5.8 billion ($7.6 billion) from taxes on bank depositors, including small time savers.

Some Cypriot lawmakers proposed a revised bill early on Tuesday that would have exempted depositors’ savings under € 20,000, but parliament still rejected the bill.

After hearing about the parliament decision, the European Central Bank maintained that despite the rejection of a key component of the proposed bailout, it would still remain in contact with its financial partners while continuing to provide liquidity to Cyprus within certain limits.

However, there are now rising concerns that Cyprus’ banks will soon face liquidity problems if they open up their doors for business and the ECB may not keep providing financial support to Cyprus.

German Finance Minister Wolfgang Schaeuble expressed his disapproval of Tuesday’s parliament vote out of Nicosia while signaling that the ECB may soon end their aid for Cyprus.

“We acknowledge and regret the decision…. For a rescue plan to exist we need a credible way to know how Cyprus will regain access to financial markets. For now the debt is too high … it must be reduced”  Schaeuble said.

“The ECB has made it clear that without a reform programme for Cyprus the aid can’t continue. Someone has to explain this to the Cypriots and I think there’s a danger that they won’t be able to open the banks again at all,” he added.

Failing to receive emergency loans from Brussels could result in Cyprus facing an imminent banking collapse and default.

The European Central Bank has threatened to terminate their emergency lending assistance programs for Cyprus’ banks which have a high level of international deposits, especially from Russia.

Cypriot Finance Minister Michael Sarris is currently in Moscow asking for financial assistance to handle their debts.

Leaders from Russia said it may reconsider the terms of a  €2.5 billion loan it made to Cyprus in 2011.

Cyprus is requesting that Russia approve a five year extension of their existing loan of €2.5 billion that matures in 2016 while lowering their 4.5 percent interest rate.

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