NICOSIA, Cyprus Lawmakers in Cyprus decisively rejected a plan Tuesday to seize up to 10 percent of peoples bank deposits in order to secure an international bailout and prevent a collapse of the countrys banks.
The vote leaves the tiny Mediterranean economy in financial limbo, but hundreds of protesters outside Parliament cheered and sang the national anthem when they heard the bill failed.
Still, Cyprus needs 15.8 billion, equivalent to $20.4 billion, to bail out its heavily indebted banks and shore up government finances.
If it doesnt get the money, the banks could fail, Cyprus government finances could be ruined for years, and the country could face expulsion from the 17-country euro-currency union. Eurozone countries and the International Monetary Fund have pledged to provide 10 billion, or $12.9 billion, in rescue loans if Cyprus can come up with the remainder.
With the countrys banks closed since Saturday to avoid bank runs, Cypriot leaders will now try to hatch a more politically palatable plan that might also satisfy officials in the eurozone and IMF.
The plan that was rejected Tuesday with 36 votes against, 19 abstentions and one absence had been amended to shield the smallest depositors, those with less than 20,000, or $25,858, in the bank. But deposits up to 100,000 euros, equivalent to $129,290, are supposed to be insured by all euro countries. There has been widespread condemnation of the plan throughout Europe since it was announced over the weekend.
Global financial markets were on edge Tuesday, but investors so far have taken the latest turmoil in Europe in stride. The Cypriot economy is tiny, and there is hope that Europes political leaders can find a way to bolster the countrys finances and prevent it from leaving the euro.
After the Cypriot vote came in, the Dow Jones industrial average ended the day 3 points higher at 14,455. Earlier in the day, European markets closed slightly lower while the euro edged down 0.4 percent against the dollar.
This is not the end of the process, but instead kicks off a further round of negotiation, said Alex White of J.P.Morgan. The Cypriot authorities wanted to conduct the vote so that they could reaffirm the extent of their difficulties to the Europeans.
Part of the reason for the market calm is that the European Central Bank has promised to do whatever it takes to protect the euro. It has a plan in place to buy the government debt of any countries that fall into financial trouble, provided they ask for help. That has helped keep bond market borrowing rates manageable for Italy and Spain, for example.
The ECB said after the Cyprus vote that it would continue providing liquidity to Cypriot banks to prevent their immediate collapse. Some had feared that if Cyprus rejected the bailout, the ECB might stop providing support, letting the banks fail.
Of the 15.8 billion, equivalent to $20.4 billion, that Cyprus needs, about 8.3 billion, equivalent to $10.73 billion, is for its two top lenders Bank of Cyprus and Laiki Bank, which is effectively controlled by the government already.
About 7.5 billion euros, equivalent to $9.7 billion, would be used to finance the countrys deficits during the next four years and to cover a 1.5 billion, equivalent to $1.94 billion, debt payment that comes due in June.
Cypriot political leaders will meet with President Nicos Anastasiades today to discuss the next steps.
Nicholas Papadopoulos, chairman of the parliamentary finance committee said Cyprus wants a renegotiation of its bailout deal, but it was against the idea of seizing savings. It has not been (implemented) in any other country in Europe, and we dont wish to be the experiment of Europe.
Facing fury at home and from Russians, who account for one in every three euros deposited in Cypriot banks, the government tried to pass the bill by amending it Tuesday to exempt small depositors with up to 20,000 in the bank.
But the change was not enough for lawmakers.
It was not possible for the Cypriot parliament and its people to accept such an unfair, disagreeable and one-sided proposal, Education Minister Kyriakos Kenevezos said on Greek state NET television. Now we are faced with very difficult developments ... No one must panic because panic never helps solve any problem.