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Eurozone says ditch Cyprus tax grab on smallest accounts

Cypriots show their palms reading 'No' during a protest against an EU bailout deal in Nicosia on March 18, 2013
Cypriots protest against an EU bailout deal outside the parliament in Nicosia on March 18, 2013. The eurozone told Cyprus on Monday to ditch the part of a hugely controversial 5.8-billion-euro grab on savings that stung even the smallest of account holder

The eurozone told Cyprus on Monday to ditch the part of a hugely controversial 5.8-billion-euro grab on savings that stung even the smallest of account holders in exchange for a 10-billion-euro sovereign bailout deal, according to a statement issued after a conference call.

The statement came after Cyprus baulked at putting the EU bailout to a vote in parliament as the crippling terms sparked a public outcry and mounting talk of a rethink by eurozone creditors, even as the uncertainty forced a prolonged closure of the island's banks.

Finance ministers "continue to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below 100,000" euros ($130,000), Eurogroup President Jeroen Dijsselbloem of The Netherlands said in the release.

A eurozone source spelled out when pressed by AFP that this meant preferably removing altogether a mooted 6.75-percent levy applied to these accounts, which combined amount to more than three fifths of all Cypriot savings despite some 30 billion attributed to large Russian investors.

The plan to rescue Cyprus
Graphic showing various aspects of the Cypriot economy

The economic and political fallout was huge following the early Saturday announcement that a raid on savings would be required alongside international loans to the Cyprus government in the fifth eurozone bailout of the three-year debt crisis.

Cyprus shut its banks through until Thursday at least and delayed a parliamentary vote on the package until Tuesday after large queues formed at ATMs on the island, while Russian President Vladimir Putin pounded a "dangerous" move and turmoil hit stock and currency trades amid concerns a precedent had been set for bigger debt-saddled eurozone economies like Italy and Spain.

The hastily-convened ministerial talks saw Dijsselbloem "reiterate that the stability levy on deposits is a one-off measure" which, he said, would "restore the viability of the Cypriot banking system" when applied in tandem with eurozone and International Monetary Fund loans.

"In the absence of this measure, Cyprus would have faced scenarios that would have left deposit holders significantly worse off," the Dutchman insisted.

A man protests outside parliament in Nicosia on March 18, 2013
A man protests outside parliament in Nicosia on March 18, 2013

Newly-installed as chairman just months into his appointment in The Hague, Dijsselbloem faced implied criticism earlier in the day from veteran predecessor and Luxembourg Prime Minister Jean-Claude Juncker, with analysts suggesting the European Union had shot itself in the foot with the decision and media lampooning a "the Great Euro Bank Robbery".

But the statement said that emergency re-negotiations would see Nicosia "introduce more progressivity in the one-off levy", in other words increasing the tax rate on bigger holdings to ensure the same 5.8-billion return.

Cyprus Finance Minister Michalis Sarris is due in Moscow on Wednesday for what looked certain to be awkward talks -- a day before the head of the European Commission, a member of the bailout 'troika,' also lands in Moscow to meet Prime Minister Dmitry Medvedev.

The statement said Cyprus should use the "temporary bank holiday" to effect "a swift decision by the Cypriot authorities and parliament to rapidly implement the agreed measures".

Banks were closed Monday for a scheduled public holiday but the uncertainty over the fate of the latest eurozone rescue package sparked jitters on world markets and fury from another key Cyprus creditor, Russia.

A Cypriot woman wearing a mask of German Chancellor Angela Merkel takes part in a protest in Nicosia on March 18, 2013
A Cypriot woman wearing a mask of German Chancellor Angela Merkel takes part in a protest against an EU bailout deal outside the parliament in Nicosia on March 18, 2013.

Eurozone leaders rejected a Cypriot request for 17 billion euros in rescue financing, insisting such a large debt would be unsustainable for the Mediterranean holiday island of less than one million people.

They offered just 10 billion euros, insisting the balance be made up from within the island, principally through the levy on bank deposits.

Hundreds of protesters gathered outside the parliament building in Nicosia to register their anger at the unprecedented tax, not asked of other eurozone countries that have sought rescue.

"Wake up, they are sucking our blood," demonstrators called to their fellow Cypriots.

Parliament speaker Yiannakis Omirou said: "There are changes to the proposed government bill to be put forward, so we need more time in parliament and the finance committee to study these new proposals."

"If Cyprus's president wants to change something regarding the levy on bank deposits, that's in his hands," European Central Bank board member Joerg Asmussen said. "He must just make sure that the financing is intact."

Moscow, which has an outstanding 2.5 billion euro loan to Cyprus and billions more in deposits in the island's banks, reacted angrily to the EU levy.

Estimates vary but the Moody's rating firm estimates that Russian companies and banks keep up to $31 billion in Cyprus, which accounts for between a third and half of all Cypriot deposits.

"We should say this directly: this simply looks like the confiscation of other people's money," Russian news agencies quoted Prime Minister Dmitry Medvedev as saying.

Europe's main stock markets lost ground and the euro fell under $1.30. In New York the euro was valued at $1.2957 at 2100 GMT, down from $1.3075 late Friday.

Asian equities also fell heavily as did the price of oil.

US stocks also fell for a second straight day Monday and the Dow Jones Industrial Average finished down 62.05 points (0.43 percent) at 14,452.06.

"If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system, they could not have done a better job," said CMC Markets analyst Michael Hewson.

The Cyprus stock market said it too would remain closed if the banks did. Washington called for a "responsible and fair" resolution of the crisis. str/kir/hkb/gk

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