Cypriot Parliament Throws Spanner

On Saturday, the EU and the IMF gave their agreement to a bailout to Cyprus worth €10 billion, to help the nation avoid bankruptcy because of its exposure to the Greek debt crisis. It was agreed that Cyprus would come up with further funding worth €5.8 billion through a controversial tax on bank deposit accounts. The tax would hit ordinary citizens and foreign investors alike with 6.75% tax on holdings below €100000 and a 9.9% levy on balances above this sum.

The move was highly contentious since EU law guarantees bank deposits of up to €100000 in the event of a banking failure, but the move was permitted since it was being applied as a tax. Naturally, the move was hugely unpopular in Cyprus and also Russia, home to many foreign investors in the Cypriot banking sector. It sparked protests and a rush to withdraw funds which led to the closure of banks (until at least Thursday) and the stock exchange. By Tuesday, the proposal had been modified to exempt “small depositers” with balances under the €20k mark.

On Tuesday night, the bailout was put to parliament in a vote delayed from Sunday. The bailout was rejected with 36 votes against it and 19 abstentions meaning that absolutely nobody supported it. Without the bailout, Cyprus runs the risk of a disorderly default in May.

The Cypriot president is meeting with political leaders to develop a plan B. The finance minister is in Russia seeking a longer repayment date and reduced interest on a €2.5 billion bilateral loan and further funding. It has been suggested that Russia may help Cyprus in exchange for exploitation rights for the islands untapped gas reserves. One would think that the EU or some of its wealthier states, might be interested in a similar accord given that much of Europe is reliant on Russian gas imports, but perhaps that is too obvious a solution to be workable.