By Michele Kambas
NICOSIA (Reuters) - Cypriot ministers were trying to revise a plan to seize money from bank deposits before a parliamentary vote on Tuesday that will secure the island's financial rescue or could lead to its default, with reverberations across the euro zone.
The weekend announcement that Cyprus would impose a tax on bank accounts as part of a 10 billion euro ($13 billion) bailout by the European Union broke with previous practice that depositors' savings were sacrosanct. The euro and stock markets fell on concern the euro zone crisis was returning.
Before the vote, which is too close to call, the government was working to soften the blow to smaller savers by tilting more of the tax towards those with deposits greater than 100,000 euros ($130,700. Many of these depositors Russians and the planned levy has already elicited an angry reaction from President Vladimir Putin.
The government says Cyprus has no choice but to accept the bailout with the tax on deposits, or go bankrupt.
A Cypriot source told Reuters the introduction of a tax-free threshold for smaller bank deposits - maybe up to 20,000 euros - was under discussion but not yet agreed.
The parliamentary speaker said debate on the bank levy would be delayed until 12:00 p.m. EDT on Tuesday, suggesting banks, shut on Monday for a bank holiday, will remain closed on Tuesday.
The euro zone has indicated that changes would be acceptable as long as the return of around six billion euros is maintained. If the Cypriot parliament votes the deal down, the euro zone would face a risk of being dragged back into crisis.
"It is up to the government alone to decide if it wants to change the structure of the ... contribution (from) the banking sector," European Central Bank policymaker Joerg Asmussen, who was pivotal in the weekend negotiations, told reporters on the sidelines of a Berlin conference.
"The important thing is that the financial contribution of 5.8 billion euros remains," he said.
Residents on the island emptied cash machines to get their funds over the weekend. The move also unnerved depositors in the euro zone's weaker economies. Investors feared a precedent that could reignite market turmoil that the European Central Bank has calmed in recent months with its pledge to do whatever it takes to save the euro.
The euro fell before tempering losses. European stocks did similarly, dropping two percent before more than halving losses.
In the bond market - often the most reliable guide to euro zone stress - safe haven German Bund futures shot up while Italian equivalents dived, suggesting some concern that Cyprus could infect its larger neighbors.
"The most important question is what would happen the following day if the bill isn't voted," Cyprus central bank governor Panicos Demetriades told parliament.
"What would certainly happen is that our two big banks would need to be consolidated. This doesn't mean that they would be completely destroyed. We will aim for this to happen in a completely orderly way."
Brussels has emphasized that the measure is a one-off for a country that accounts for just 0.2 percent of European output. The worst fear is that savers in other, larger European countries become nervous and start withdrawing funds, although there was no immediate sign of that on Monday.
U.S. economist Paul Krugman wrote in The New York Times: "It's as if the Europeans are holding up a neon sign, written in Greek and Italian, saying 'Time to stage a run on your banks!'"
PUTIN ANGRY
Cyprus's banking sector dwarfs the size of its economy and its banks have been severely hurt by exposure to much larger neighbor Greece.
Its open economy has meant its banks also attract cash from Russians. Moscow is considering extending an existing 2.5 billion euro loan to help bail the island out and said the fact it had not been consulted about the bailout would come into play.
"It turns out that the euro zone actions ... took place without discussions with Russia, so we will consider the issue of restructuring the (Cyprus) loan taking into account our participation in the joint actions with the European Union," Russian Finance Minister Anton Siluanov told Reuters.
President Vladimir Putin criticized the bank levy as unfair and setting a dangerous precedent.
"Putin said that such a decision, should it be made, would be unfair, unprofessional and dangerous," Kremlin spokesman Dmitry Peskov told reporters.
Approval in Cyprus's fractious 56-member parliament is far from a given: no party has an absolute majority and three parties say outright they will not back the tax. A vote initially planned for Sunday was rescheduled to give more time to build a consensus.
On Sunday, a source close to the consultations told Reuters authorities were hoping to cut the tax to 3.0 percent from 6.7 percent for deposits under 100,000 euros. The rate for deposits above that would then be jacked up to 12.5 percent from 9.9 percent.
Cypriot President Nicos Anastasiades, a conservative elected just three weeks ago, said in a TV address that the tax was an alternative to a disorderly bankruptcy. It was painful, but "will eventually stabilize the economy and lead it to recovery".
Savers who lost money would be compensated by shares in commercial banks, with equity returns guaranteed by future revenues expected from natural gas discoveries, Anastasiades said. But many legislators remain unconvinced.
"Essentially parliament is called to legalize a decision to rob depositors blind, against every written and unwritten law," said Yiannakis Omirou, speaker of parliament and head of EDEK, the small Socialist party. "We refuse to subscribe to this." ($1 = 0.7654 euros)
(Additional reporting by Karolina Tagaris, Annika Breidthardt, Jan Strupczewski, John O'Donnell. Writing by Peter Graff/Mike Peacock. Editing by Janet McBride)
Source: http://news.yahoo.com/cyprus-works-tax-levy-deal-bailout-approved-002853875--business.html
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