Cyprus Rejects Bank Deposit Tax, Scuttling Bailout Deal

The lawmakers sent President Nicos Anastasiades back to the drawing board with international bailout negotiators to devise a new plan that might still enable the country to receive a financial lifeline, while avoiding a devastating default that could reignite the euro crisis.

Lawmakers rejected the plan, with 36 voting no and 19 abstaining, arguing that it would be unacceptable to take money from account holders. One member of Parliament who was out of the country did not vote.

Marios Karoyian, the head of the Democratic Party in Mr. Anastasiades’s coalition government, called the bailout terms an “attack” against Cyprus. “The decision for a haircut is unethical and erodes the foundation of the E.U.,” he said. “We’re dealing with raw blackmail that could lead to the collapse of the euro zone.”

Analysts have raised the possibility of a bank run in Cyprus and a cut-off of financing to Cypriot banks from the European Central Bank if the measure did not pass. It is still possible banks might not be able to open their doors Thursday, the day that a scheduled bank holiday was supposed to end.

Michael Olympios, chairman of the Cyprus Investor Association said Parliament’s rejection of the bailout deal “will buy us some time to see if we can come up with a better agreement.”

He said one possibility under active consideration was for a Russian bank to buy Cyprus's biggest troubled lender, Cyprus Popular Bank, in a deal that could reduce the amount of the €10 billion bailout sought by Cyprus. Any such move would very likely be backed by the Kremlin, Mr. Olympios added, and could reduce the tax that Russian depositors might otherwise have to pay.

The Cypriot finance minister headed to Moscow earlier in the day to seek financial assistance from Russia.

The bailout measure failed Tuesday night despite a revision that would have removed some objections by exempting small bank accounts from the levies.

The European Central Bank indicated late Tuesday that it would not immediately cut off emergency cash — without which Cypriot banks probably could not survive. In a terse statement, the E.C.B. said it had taken note of the Cypriots Parliament’s decision and was consulting with the International Monetary Fund and European Commission, its partners in the so-called troika of international lenders that are trying to keep Cyprus financially afloat.

But, in a tacit warning that it would not provide the so-called emergency liquidity assistance forever, the E.C.B. said it would stick to rules that allow lending only to solvent banks. The Cyprus banks, while wobbly, are not yet insolvent. “The E.C.B. reaffirms its commitment to provide liquidity as needed within the existing rules,” the central bank said.

The original terms of the bailout, as reached last weekend, called for a one-time tax of 6.75 percent on deposits of less than €100,000, or $129,000, and a 9.9 percent tax on holdings of more than €100,000. The taxes, a condition imposed by Cyprus’s fellow E.U. members, were meant to raise €5.8 billion of the total €10 billion bailout cost.

Under the revision put forward by Mr. Anastasiades early Tuesday, depositors with less than €20,000 in the bank would be exempt, but the taxes would remain in place for accounts above that amount.

The rejection drew loud cheers and cries of joy from a crowd of more than 500 protesters who had gathered in front of Parliament since late afternoon, carrying banners denouncing what they said was a confiscation of their private funds. Some wielded unflattering posters of Chancellor Angela Merkel of Germany, a day after a demonstrator breached security at the German Embassy and climbed to the roof, throwing down the German flag.

“Today, Germany is engaging in Nazism again, not with the weapon of force, but with money,” said a pensioner, Dimitris, 67, who would give only his first name.

This article has been revised to reflect the following correction:

Correction: March 19, 2013

An earlier version of this article misstated the vote totals in Parliament. The vote was 36 against and 19 abstaining, not 36 against and 19 in favor.