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Cyprus Passes Parts of Bailout Bill, but Delays Vote on Tax

(Photo: Tomas Jansson / Flickr)

Nicosia, Cyprus – Lawmakers took steps late Friday to revise a formula for obtaining a bailout of Cyprus’s banks but faced strong signals that the plan would not pass muster with international lenders.

The Parliament put off until later this weekend a vote on a crucial new proposal that would confiscate 22 to 25 percent of uninsured deposits above 100,000 euros through a new tax on account holders in one of the nation’s most troubled banks.

So with a deadline imposed by the European Central Bank looming on Monday, it appeared there was still no immediate path to a lifeline of 10 billion euros, or $13 billion, that Cyprus needs to keep its banks from collapsing.

Cyprus’s so-called troika of lenders — the International Monetary Fund, the European Commission and the European Central Bank — must still approve any plan. President Nicos Anastasiades was scheduled to fly to Brussels on Saturday to meet with European Union leaders, a spokesman said.

Monday is a national holiday in Cyprus, but banks are supposed to reopen on Tuesday for the first time in more than a week. There is widespread fear of a classic bank run.

On Friday, Cypriots jammed into supermarkets after lining up all day Thursday at automated teller machines to withdraw as much cash as possible. Gas stations were taking cash only, and some retailers reported that they would no longer accept credit.

One of the provisions Parliament approved Friday would impose new restrictions on withdrawing cash or moving money out of the country when the banks reopen. These new capital controls would prohibit or restrict check-cashing and bar “premature” account closings or any other transaction the authorities deemed unwarranted.

Lawmakers also voted to restructure the nation’s largest and most troubled bank, Laiki Bank, by splitting off its troubled assets into a so-called bad bank. Accounts with no problem would be transferred to the nation’s largest financial institution, the Bank of Cyprus. Lawmakers also voted to require that any bank on the verge of bankruptcy be split apart in the same way.

By effectively shutting down one of the banks needing support, the government could lower the 5.8-billion-euro sum that international lenders are demanding in exchange for a bailout. The consolidation of Laiki, also known as Cyprus Popular Bank, effectively relieves the government of a large expense of supporting the banking system, which is on the verge of collapsing under a mountain of souring loans to Greek businesses and individuals.

Still to be voted on is the measure to impose a tax of 22 to 25 percent on uninsured deposits at the Bank of Cyprus. That proposal was made after lawmakers rejected a plan earlier in the week to tax insured deposits to help raise the amount needed to secure the bailout. The Parliament appears to be trying to make up the difference in part by shifting the burden to large account holders.

When euro zone finance ministers negotiated the original bailout terms last weekend, Cypriot officials had resisted limiting the tax to large accounts, evidently to avoid damaging the country’s reputation as a haven for wealthy banking clients. Many of the wealthiest citizens of Russia have euro-denominated bank accounts in Cyprus, which is one reason that euro zone finance ministers have taken such a hard line.

The decision to tax uninsured deposits came after Cyprus proposed nationalizing the pension funds of state-owned Cypriot companies.

Lawmakers approved the pension takeover on Friday, but the move was denounced in Germany, whose political and financial influence in the euro zone tends to dictate policy.

“When you consider that there was massive resistance against involving the savings, then it is not easy to see how tapping the pension funds, which we view as socially a much more drastic step, is a very good idea,” Steffen Seibert, a spokesman for the German chancellor, Angela Merkel, told reporters.

The suggestion of tapping pension funds touches off a visceral response in Germany, where history has proved the dangers of such ideas. German pensions were tapped to finance both world wars, and the idea remains anathema to German leaders today.

“The German reaction to such suggestions quickly becomes emotional,” said Bernd Raffelhüschen, a professor of economics at the Albert-Ludwig University in Freiburg. “But looking at it rationally, it must be said that the German reaction is not stupid.”

Mr. Seibert, the Merkel spokesman, urged Cyprus to return to the bailout plan negotiated last weekend, including the deposit tax on ordinary investors, even though Parliament roundly rejected that measure on Tuesday.

The Cypriot government has ordered banks to keep A.T.M.’s filled with cash so long as the banks themselves remain closed. But that has been of little help to the thousands of international companies that bank in Cyprus, which cannot transfer money in and out of those accounts to conduct business.

The European authorities said Friday that members of the troika were focused mainly on the laws being drafted by the Cypriots to deal with failing banks and restrict flows of money out of the country.

“The law on bank resolution that is adopted needs to be a law applicable in a generic fashion, so not a law that would be applicable in only one particular case,” Simon O’Connor, a spokesman for Olli Rehn, the European commissioner for economic and monetary affairs, said at a news conference in Brussels.

Those comments seemed to suggest that troika officials want the Cypriots to be ready to shut down troubled lenders in addition to Laiki Bank, like the Bank of Cyprus, with the option of imposing significant losses on large depositors.

Other officials gave assurances Friday that Cyprus could impose capital controls, like strict curbs on daily withdrawals and withdrawals of savings deposits, without violating European Union rules that are meant to foster flows of capital between member states.

“It’s a unilateral decision by the member state and it does not require prior approval from the commission,” Chantal Hughes, a spokeswoman for Michel Barnier, the European commissioner for financial services, said at the same news conference. A country like Cyprus “can impose those restrictions as long as the criteria laid out in the treaties are met,” she said.

But she underlined that imposing capital controls was “not meant to be a never-ending situation” and that reaching an overall deal was vital.

On Friday, Greece also struck a deal to have one of its biggest lenders, Piraeus Bank, take over the Greek-based units of Cyprus’s three main banks. That move was meant to relieve Cyprus of the cost of supporting those units, while ensuring that Greek savers in those banks would be insulated from whatever new bailout terms might be struck.

A delegation of Cypriot officials led by the finance minister, Michalis Sarris, remained in Moscow until Friday morning to press the case for additional aid, but there were no reports of progress, and the officials stayed out of sight.

The Russian prime minister, Dmitri A. Medvedev, said on Friday at a joint news conference in Moscow with José Manuel Barroso, the president of the European Commission, that his country was not walking away from Cyprus.

Instead, Mr. Medvedev said, Russia will wait until a broader bailout deal is done before extending additional help.

“Regarding our participation in this process, we haven’t shut the doors,” Mr. Medvedev said. “Of course we’ve got our own economic interests at stake.”

Additional efforts to help Cyprus will come “only after a final settlement scheme” involving the European Union, he said.

The situation in Cyprus “is very dramatic and should be addressed as soon as possible,” Mr. Medvedev added.

Contributing reporting were Melissa Eddy in Berlin, James Kanter in Brussels, David M. Herszenhorn in Moscow, Niki Kitsantonis in Athens and Andreas Riris in Nicosia.

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