Cypriot Parliament has voted against the tax on bank deposits, a condition for receiving a loan package from the euro area. The project was rejected by 36 votes against, 19 abstentions and no votes in favor. “The project was rejected,” said speaker of Parliament in Nicosia, Yiannakis Omiru. Thousands of demonstrators gathered in front of Parliament have expressed satisfaction with the vote.
The main ruling party, Democratic Movement, announced that it would abstain from voting. Democratic Movement controls 20 of the 56 seats in parliament and govern with the Democratic Party, which has 8 seats. The other major parties, the Communist Party and the Green Party, are against the tax.
Cypriot President, Nicos Anastasiades said Tuesday that there is a backup plan for the rejection of tax. “We have a plan B,” he said. Minister of Finance of the Republic of Cyprus has resigned in the context of issues of adopting legislation on bank fees, but his resignation has not yet been accepted.
Euro area members agreed Saturday to help Cyprus with a loan of €10 billion, subject to government collection of funds of €5.8 billion by charging deposits in local banks. The original version of the tax provided a 6.75% tax on deposits less than $100,000 and 9.9% for those above this threshold. Subsequently, the plan was modified to exempt from tax deposits under €20,000.
The rejection of this tax will actually mean rejecting the anti-crisis program altogether. In this case, according to Cypriot analysts, authorities will have no choice but to seek Russia’s help.
What would the cancellation of financial assistance program for Cyprus mean? Cypriot banking system willnot work for at least one more day, raising the possibility of corporate funds freezing. The 9.9% tax on all bank deposits greater than $100,000 might increase to 12.5% -13%. It is increasingly clear that what happens is a consequence of the failure of informal discussions between the EU, Russia and Cyprus in 2012.
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