Cyprus votes on a tax on bank savings as bailout looms

THE President of Cyprus was tonight scrambling to gather support in parliament for an international bailout that imposes a tax on people's savings, before banks reopen and panicked residents try to withdraw their money.

If tomorrow's vote goes against the €10bn (£8.6bn) assistance package agreed with the European Union and the International Monetary Fund, there are fears that delicate investor confidence in the eurozone could be shattered. Two Cypriot banks could run out of money within days and the island may be forced into a default and out of the euro currency. President Nicos Anastasiades said he was in talks  to try and limit the bailout's effect on smaller savers, but has repeatedly stressed there was little other choice to save Cyprus after its banks took huge losses from the debt writedown in Greece.

"We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis," he said in a statement. In an address on state TV last night, he urged political parties to take into account "the best possible interest of our citizens and our country".

In Cyprus there was anger that a better deal was not hammered out in Brussels on Friday. No other bailouts for struggling eurozone countries have put the burden so directly on citizens: under the package, people with less than €100,000 in the bank would have to forfeit 6.75 per cent of their savings. Those with more would pay 9.9 per cent.  "[The Brussels meeting] was not a negotiation, it was raw blackmail," said Giannakis Omirou, leader of the Social Democrats, the island's fourth biggest party.

Parliament was meant to vote on the tax today, but the decision prompted such outrage that the emergency session was postponed. Angry Cypriots queued outside cash machines across the island, but many were unable to withdraw their money. The government denied the machines had been disabled, but a leaked document from the Central Bank of Cyprus published on a local news website said that credit institutions had been ordered to freeze all transfers until further notice. Financial institutions will remain closed for a holiday tomorrow, and there were rumours on the island tonight that they may not even open as expected on Tuesday. As soon as savers are able to withdraw their cash, there are fears of a run on the banks.

"The situation is unacceptable, they have fooled people. We're being destroyed," a woman outside a bank said. One Cypriot drove his digger to a bank and threatened to destroy it. "I'm protesting what they're doing to our savings," Christos Karandokis, the driver, told State television.

It is not just Cypriots who will be out of pocket. The island is home to thousands of British expatriates who will not be shielded from the measures. The chancellor, George Osborne, said the British troops stationed in Cyrpus, however, would be compensated for their losses.

Foreigners hold about 40 per cent of the deposits in Cypriot banks, and most of that is Russian money. Concerns that not all those funds were legally obtained was one reason why this unique deal was hammered out for the island. Other eurozone nations were loath to see any of their tax payers' funds potentially aiding money launderers. There were also fears that Cyprus, with its GDP of around €18bn, would not be able repay a huge bailout.

Mr Anastasiades was last night trying to rally support among lawmakers. The ruling DISY party does not have a majority in the 56-seat Parliament and needs another nine votes to secure approval of the bill. If the vote is passed, the tax could be levied on all bank accounts by the time the banks reopen. The measure is expected to raise €5.8bn for the struggling nation, while Nicosia will also increase its corporate tax rate. The remaining funds will come from the IMF and potentially from Russia.

Q&A: The perils if Cyprus votes 'No'

Q: Why does Cyprus  need a bailout?

A: Before the financial crisis Cypriot banks grew rapidly, lending large amounts of money to borrowers in Greece - and buying significant chunks of Greek government debt. Two years ago the IMF estimated Cypriot banks' combined assets were more than seven times larger than Cyprus's entire GDP. When Greece went into freefall and imposed a 'haircut' on its creditors, Cyprus took a big hit.

Q: So why didn't the government just nationalise the banks, like we did with Northern Rock?

A: Precisely for the reason above. Cyprus was affected by the economic slowdown like everybody else, and its government could not afford to buy them out. The markets also saw its exposure to Greece and raised its borrowing costs accordingly.

Q: So why does the EU want to make Cypriot savers pay?

A: Bailouts always come with strings attached, be they tax rises, austerity - or in this case, a tax on savings. The deal would require anyone with more than €100,000 in savings to pay almost 10 per cent, and anyone with less to pay 6.75 per cent. This was agreed due to the huge amount of deposits in Cypriot banks being from overseas clients - in many cases from dubious Russians suspected of money-laundering. Unfortunately for ordinary Cypriots, they've been hit too.

Q: What happens if Cyprus votes against the deal?

A: It's not certain. Either the conditions are eased, or Cyprus defaults on its debts, leaves the euro and looks for other sources of finance - which, ironically in this case, may be Russia.