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Cyprus MPs under pressure to rethink bank levy

Cypriot employees of the Laiki (Popular) Bank take part in a protest outside parliament on March 21, 2013 in Nicosia
Cypriot employees of the Laiki (Popular) Bank take part in a protest outside parliament on March 21, 2013 in Nicosia. Cypriot politicians were facing increasing pressure to rethink their rejection of a levy on bank deposits, as a deadline to secure an EU

Cypriot politicians were facing increasing pressure to rethink their rejection of a levy on bank deposits, as a deadline to secure an EU bailout loomed closer Saturday.

They approved the first three of eight measures put forward by the government in their bid to meet the terms of the EU bailout in a late-night session late on Friday.

But with the the clock ticking down to a crunch Sunday meeting with eurozone finance ministers, MPs still have to debate more contentious issues, such as a tax of up to 15 percent on bank deposits of 100,000 euros ($129,000) and more.

The government needs to seal the package by Monday or face being denied European Central Bank emergency funds, a blow that would devastate the island's banks and its economy.

On Tuesday, MPs flatly rejected proposals for a 9.9 percent tax on bank deposits over 100,000 euros, with a 6.75 percent levy on deposits of 20,000-100,000 euros.

The original proposal had also proposed to tax savings below 20,000, but the parliament's financial committee had dropped it before the vote.

The levy would have hurt many ordinary Cypriots as well as many Russians, including wealthy tycoons. They hold between a third and half of all Cypriot deposits and are believed to have more than $30 billion in private and corporate cash in the island's banks.

With the EU deadline approaching, Cyprus's chamber of commerce and employers' federation have joined its major banks in calling on deputies to reconsider their rejection of the levy.

EC President Jose Manuel Barroso (L) and Russia's Prime Minister Dmitry Medvedev in Moscow, on March 22, 2013
European Commission President Jose Manuel Barroso (L) and Russia's Prime Minister Dmitry Medvedev attend a press conference following their fruitless talks on the Cyprus banking crisis in Moscow, on March 22, 2013.

Some of the bank employees demonstrating outside parliament were among those calling for a rethink on the tax, or "haircut".

In Friday's late-night session, the MPs backed a national solidarity fund to be set up through the nationalisation of public and private sector pensions.

They also approved capital controls to prevent a run on the island's troubled banks when they finally reopen on Tuesday after more than a week.

And they passed a restructuring plan drawn up by the central bank that will separate good debts from bad in the island's troubled banks, particularly second largest lender Popular Bank -- Laiki in Greek.

This bill, easily the most contentious of the three approved, passed by 26 votes to two, with 25 abstentions.

Acting ruling Disy party leader Averof Neophytou has appealed to MPs to back the legislation, saying it would guarantee all deposits of up to 100,000 euros. Those with larger balances however might have to wait years to get all their money back.

An employee of the Laiki (Popular) Bank  sits on the ground during a protest in Nicosia on March 22, 2013
An employee of the Laiki (Popular) Bank sits on the ground as protesters block the streets leading to parliament in Nicosia on March 22, 2013.

Neophytou said the plan would also secure some 8,000 jobs in Popular Bank, although a few hundred might be lost through restructuring.

Friday's emergency session came after angry bank employees, fearful for their jobs, demonstrated outside parliament as rows of riot police lined up behind barriers facing them.

MPs adjourned the session shortly before midnight with no time set to resume debate on the rest of the government's package. It is aimed at raising 5.8 billion euros ($7.47 billion) to unlock loans worth 10 billion euros.

German Chancellor Angela Merkel warned Cyprus against "exhausting the patience of eurozone partners" at a meeting Friday with the parliamentary group of her junior Free Democratic Party coalition partners, participants told AFP.

Some EU sources have said the bloc is ready to eject Cyprus from the eurozone to prevent contagion of other debt-hit members such as Greece, Spain and Italy.

While bank employees demonstrated Friday in favour of pushing through a levy on deposits, other protesters vehemently oppose the measure.

A group of about 30 hooded youths burned a European flag next to the parliament building in front of police barricades. "The haircut is robbery," they chanted.

Eurozone finance ministers and IMF chief Christine Lagarde will gather in Brussels on Sunday in a bid to finalise the Cyprus rescue before Monday's deadline.

EU leaders said next week's summit with Japan to launch free trade talks had been postponed indefinitely as they try to resolve the situation in Cyprus.

Ratings agency Moody's downgraded the credit-worthiness of all three main Cyprus banks, citing expected depositor losses, the imposition of capital controls and uncertainty over recapitalisation plans.

Cypriot hopes of an economic lifeline from Russia have so far come to nothing. Finance Minister Michalis Sarris left Moscow on Friday after two days of inconclusive talks.

But Prime Minister Dmitry Medvedev said later that Moscow had not closed the door on future assistance.

Athanasios Orphanides, a former governor of the Central Bank of Cyprus denounced the terms of the EU bailout, in an interview with AFP.

"When governments in some of the larger European member states start blackmailing the government of one small member state to confiscate deposits, the question is, who's next?" said Orphanides, who led the Central Bank of Cyprus from 2007-2012.

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