The Cypriot parliament votes against plans to tax people’s bank deposits to secure a bailout from the EU and IMF. Meanwhile, the RAF flies 1 million euros in to keep British forces there in cash.
The decision makes it more likely there could be a default and banking collapse in Cyprus, with exit from the euro a possibility.
Parliament overwhelmingly rejected an EU plan for a tax on savings, despite the Cypriot government’s decision to exempt those with less than 20,000 euros from the levy. Only one MP voted in favour.
Hundreds of protesters outside parliament cheered and sang the national anthem when they heard the news.
The financial crisis in Cyprus has prompted the Ministry of Defence to send an RAF plane carrying 1 million euros to the island as a “contingency measure” to help British troops and their families.
The money will provide people with emergency loans if cash machines and debit cards stop working.
In Cyprus, the original plan to deal with the crisis would have seen all bank deposits of under 100,000 euros hit by a 6.75 per cent tax, with deposits of over 100,000 euros attracting a rate of 9.9 per cent.
But amid public outrage, the government said the first 20,000 euros would be exempted from the tax, which would protect small savers.
The governor of the central bank in Nicosia, Panicos Demetriades, had sent out mixed signals.
He had proposed that all sums below 100,000 euros (£86,000) should be protected, but also said that if deposits of under 20,000 euros (£17,000) are exempted, the government will not raise the required 5.8bn euros.
Chancellor George Osborne has said forces personnel and civil servants on the island will be “compensated in full” if they are affected by the levy.
The Cypriot parliament most approve a plan to tax money in people’s bank accounts as a condition of a 10bn euro bailout from the European Union (EU) and International Monetary Fund.
Without a vote in favour, Cyprus faces potential bankruptcy and a possible exit from the euro, reigniting concerns about the viability of the single currency.
But as MPs gathered to vote, President Nicoas Anastasiades said the package was unlikely to be approved because it was “unjust”.
Cyprus is the fifth EU country in line for a bailout, but it is the only state in which bank depositors are being hit.
Banks in Cyprus will be shut until Thursday to prevent people from withdrawing all of their money before the levy kicks in.
About a third of all deposits in Cypriot banks are believed to be held by Russians, and Moscow is angry that its citizens are being targeted in this way.
Christine Lagarde, managing director of the IMF, said today that the organisation was “extremely supportive of the Cypriot authorities’ intentions to introduce more progressive rates in the one-off tax”.
Cyprus has been left in a precarious position because of its close financial relationship with Greece, which has received two bailouts.
Many Cypriots blame German Chancellor Angela Merkel for the savings tax, but although the German and other EU governments insisted on a levy as the price of a bailout, the details were left to the Cypriot government.