BRUSSELS' grip slipped on its eurozone rescue strategy tonight as Cyprus rejected the conditions for its €10bn bail-out, and appeared to turn to Russia for help instead.
In a vote in Cypriot parliament, not a single politician voted for the proposed bank levy, which was designed to raise the €5.8bn needed to secure a vital €10bn cash injection from Europe and the IMF. President Nicos Anastasiades, led the rebellion by abstaining. There were 19 in abstentions and 36 votes against.
Mr Anastasiades telephoned Angela Merkel ahead of a crucial debate on the botched bail-out to tell her the results would be negative. He told reporters that politicians “feel and think it isn’t just and that it’s against the interest of Cyprus.”
Meanwhile, the Cypriot finance ministry said its boss had gone to Moscow. Government sources also said the Cypriot government was considering asking Midde East investors for help. Cypriot banks will be closed for the fourth day today. The Royal Air Force flew €1m in cash to Cyprus for army personnel.
The European Central Bank said it would continue to provide liquidity to Cyprus under existing rules.
But the confusion caused equities to fall across Europe while traders ditched the euro amid fears of a fresh banking crisis. In Italy the MIB dropped 4.6pc, the French CAC fell 1.3pc, the German DAX slid 0.8pc. The worse hit was Spain’s IBEX fell 2.2pc as traders feared its banks would be first to suffer any contagion. The yield on 10-year gilts fell to their lowest level this year as traders sought a safe haven. Luis de Guindos, Spain’s finance minister, scrambled to reassure investors. “Deposits of under €100,000 are sacred from the point of view of the bloc’s rules and Spanish rules,” he said. Luc Frieden, Luxembourg’s finance minister, told Bloomberg: “We will make sure that deposits in Europe are safe.” He added that the fisasco could “not be seen as destroying the confidence that people have” in the European financial system.
But analysts were not convinced. “There is no precedent for what would happen if Cyprus rejected the conditions,” Holger Schmieding, chief economist at Berenberg Bank wrote in a note. “Our best guess is that Europe would give Cyprus a brief and final chance to rethink and vote again.”
President Anastasiades has called an emergency meeting of political leaders this morning, the fifth day since the government and the euro group thrashed out the rescue plan. The original plan, backed by the EU, the European Central Bank and the IMF, was for Cyprus to raise €5.8bn from a tax of 6.75pc on all desposits under €100,000 and 9.9pc above that level. The parliamentary vote was delayed twice while changes were inserted to protect deposits of under €20,000. However, the move has been widely condemned as tearing up the EU’s pledge to guarantee deposits up to €100,000.
Sharon Bowles, chairman of the European Parliament’s economic committee, said the ECB’s authority had been damaged. “Central banks have to be tough sometimes, but what hope is there for accountability when they seemingly force decisions like this at gunpoint with no regard for financial legislation,” she said. “We must question ECB independence on supervision. If anything this strengthens the case for more democratic accountability.”
The former Governor of the Central Bank of Cyprus, Anthanasios Orphanides, said there had been a “very serious blunder by European governments that are essentially blackmailing the government of Cyprus to confiscate the money that belongs rightfully to depositors in the banking sector in Cyprus...What we are witnessing is the slow death of the European Project.” Gervais Williams of Miton Capital Partners said: “My worry is that the Cyprus announcement will change the behaviour of large depositors. And that is the thin end of a very worrying wedge.
- Louise Armitstead, Telegraph.co.uk