NICOSIA, March 20 (Reuters) - Cyprus
overwhelmingly rejected a proposed levy on bank deposits as a condition for a
European bailout on Tuesday, throwing international efforts to rescue the
latest casualty of the euro zone debt crisis into disarray.
The vote in the tiny legislature was
a stunning setback for the 17-nation currency bloc, angering European partners
and raising fears the crisis could spread; lawmakers in Greece, Portugal,
Ireland, Spain and Italy have all accepted austerity measures over the last
three years to secure European aid.
With hundreds of demonstrators
outside the parliament chanting "They're drinking our blood", the
ruling party abstained and 36 other lawmakers voted unanimously to reject the
bill, bringing the Mediterranean island, one of the smallest European states,
to the brink of financial meltdown.
Finance Minister Michael Sarris had
already headed to Moscow, amid speculation Russia could offer assistance given
the high level of Russian deposits in Cypriot banks. President Nicos
Anastasiades, barely a month in office, spoke by phone with Russian President
Vladimir Putin after the vote.
Anastasiades was due to meet party
leaders at 9 a.m. (0700 GMT) on Wednesday to explore a way forward.
"The voice of the people was
heard," 65-year-old pensioner Andreas Miltiadou said among a crowd of
demonstrators jubilant after the vote.
EU countries had warned they would
withhold 10 billion euros ($13 billion) in bailout loans unless depositors in
Cyprus, including small savers, shared the cost of the rescue, an unprecedented
step in the stubborn debt crisis.
The European Central Bank had
threatened to end emergency lending assistance for teetering Cypriot banks,
which were hard hit by the financial crisis in neighbouring Greece.
The island's partners barely
disguised their anger.
Euro zone paymaster Germany, facing
an election this year and increasingly frustrated with the mounting cost of
bailing out its southern partners, said Cyprus had no one to blame but itself
for the gravity of the situation.
DEBTS TOO HIGH
"Cyprus requested an aid
programme," German Finance Minister Wolfgang Schaeuble told ZDF
television. "For an aid programme we need a calculable way for Cyprus to
be able to return to the financial markets. For that, Cyprus's debts are too
high."
Dutch Finance Minister Jeroen
Dijsselbloem, who chairs the Eurogroup of finance ministers, said the bailout
offer still stood providing the conditions were met. European Central Bank
Governing Council member Ewald Nowotny called on Cyprus to show
"discipline and the readiness to act rationally."
But it was Europe's demand at the
weekend that Cyprus break with previous EU practice and impose a levy on bank
accounts that led outraged Cypriots to empty bank cash machines and unsettled
financial markets.
An important issue in negotiations
has been the high level of deposits held in the island's banks by non-EU
citizens and companies, notably from Russia, where Cyprus has established
itself as a major provider of offshore financial services.
BACKLASH
The EU and International Monetary
Fund are demanding Cyprus raise 5.8 billion euros from bank depositors to
secure the bailout it needs to rescue its financial sector. They say a bailout
of more than 10 billion euros would tip Cyprus's debt level into unmanageable
territory for its 1.1 million people.
But lawmakers said the levy on
deposits crossed a red line.
"You can't take a 10,000-metre
jump without a parachute. And that's what they're asking of us," said
George Perdikis of the Greens Party.
While Brussels has emphasised that
the measure was a one-off for a country that accounts for just 0.2 percent of
European output, fears have grown that savers in other, larger European
countries might be spurred to withdraw funds.
Dijsselbloem, the Eurogroup chair,
said there would be no need to impose a levy in any of the 16 other euro
countries.
Some Cypriots hope they can get aid
from Russia, which has bailed out Cyprus in the past. Many Russians keep their
money in Cyprus and operate businesses from there.
Russian authorities have denied that
the Kremlin might offer more money, possibly in return for a future stake in
Cyprus's large but as yet undeveloped offshore gas reserves, which have raised
the island's strategic importance.
An influx of Russian money and
influence since the collapse of the Soviet Union has led some Brussels
officials to complain privately that Cyprus acts at times as a "Trojan
donkey" for Moscow inside the European Union since it joined in 2004.
Banks in Cyprus are to remain shut on Wednesday
to avoid a bank run. The island's stock exchange will also be closed on
Wednesday.
