Cyprus rejects deposit levy in blow to European bailout plan

Cyprus’s parliament rejected an unprecedented levy on bank deposits, dealing a blow to European plans to force savers to shoulder part of the country’s bailout in a standoff that risks renewed tumult in the euro area.

Cypriot legislators in the capital Nicosia voted 36 against the proposal with none in favor in a show of hands today. There were 19 abstentions. Hammered out by euro-area finance chiefs at the weekend, the deal had sought to raise 5.8 billion euros ($7.5 billion) by drawing funds from Cyprus bank accounts in return for 10 billion euros in international aid.

Stocks dropped and the euro fell to a three-month low against the dollar at the prospect of impasse in Cyprus. While the Mediterranean island nation accounts for less than half a percent of the 17-nation euro economy, European officials including Dutch Finance Minister Jeroen Dijsselbloem said that Cyprus must contribute to its own bailout, while stressing that the Cyprus situation is unique.

“There is no precedent for what would happen if Cyprus rejected the conditions,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note before the vote. “Our best guess is that Europe would give Cyprus a brief and final chance to rethink and vote again.”

Bloomberg News

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