Chaos as Cyprus votes down bailout bank grab
CYPRUS plunged Europe into fresh crisis as it became the first country to turn down a bailout since the economic crash began.
Its parliament forcefully rejected a critical draft bill that would have seized part of people's bank deposits in order to qualify for a vital international bailout.
It forced the European Central Bank to back away from earlier threats to withhold aid -- but brought the small Mediterranean island closer to banking meltdown.
The vote was also a setback for the eurozone after several other countries, including Ireland, accepted unpopular austerity measures.
Upping the ante last night, Cypriot government MP Marios Mavrides raised the prospect of leaving the euro and printing the Cyprus pound again. "That will be the end of Cyprus in the eurozone," he said on BBC 'Newsnight'.
Germany's finance minister warned that it was unclear whether the banks in Cyprus would ever be able to open again.
Wolfgang Schaeuble claimed two of Cyprus's big banks are currently being propped up solely by emergency liquidity from the European Central Bank.
"Someone needs to explain this to the Cypriots," he said.
The new crisis highlights political disagreements and piles pressure on Europe's leaders over their ability to take control of the financial crisis.
Stocks dropped and the euro fell to a three-month low against the dollar as the markets digested the prospect of impasse in Cyprus and new, bitter divisions in Europe.
The latest flare-up erupted when the island state's parliament voted overwhelmingly to reject the proposed levy on bank deposits.
With hundreds of demonstrators facing riot police outside parliament and chanting, "They're drinking our blood", the ruling party abstained from the vote.
Amid fears about what will happen next, the ECB quickly issued a statement in Frankfurt promising to provide liquidity to banks in Cyprus, within the central bank's rules.
But European leaders will be forced into feverish action today to hammer out some sort of deal.
The EU and IMF are demanding that Cyprus raise €5.8bn from depositors to add to the €10bn bailout and rescue its financial sector.
Last night's vote now puts Cyprus on a direct collision course with the rest of the EU.
Although Cyprus is the smallest eurozone country to be bailed out, the details of the proposed plan had already sent shockwaves through the single-currency area.
It was to be the first time savers' banks accounts have been directly targeted. Other bailed-out countries including Ireland, as well as Greece and Portugal, have raised funds by imposing new taxes.
Finance ministers had urged the Cypriot government to avoid hitting accounts below €100,000, and instead increase the levy on big accounts, which are unprotected by the state-deposit guarantee.
Newly-elected President Nicos Anastasiades earlier said he expected parliament to reject the tax on bank deposits "because they feel and they think that it is unjust and it's against the interests of Cyprus at large."
But EU countries said before the vote that they would withhold bailout loans unless depositors in Cyprus shared the cost of the rescue, and the ECB had threatened to end emergency-lending assistance for teetering Cypriot banks.
"There is no precedent for what would happen if Cyprus rejected the conditions," Holger Schmieding, an economist at Berenberg Bank in London, said before the vote.
"Our best guess is that Europe would give Cyprus a brief and final chance to rethink and vote again."
Banks were due to remain closed today to avoid a bank run where deposits flood out of the system. The island's stock exchange also suspended trading.
But both banks and the stock exchange were due to re-open tomorrow, creating a looming deadline for talks – but this now seems unlikely.
For worried Cypriots – who emptied the island's cash machines over the weekend in panic – the vote was seen as a victory, at least in the short term.
Jubilant crowds outside parliament broke into applause following the vote, chanting, "Cyprus belongs to its people."
"The voice of the people was heard," said Andreas Miltiadou, a 65-year-old pensioner among the demonstrators.
Cypriot Finance Minister Michael Sarris flew to Moscow yesterday to seek Russian financial assistance. He was forced to deny by text message reports that he had resigned, which rattled nerves as lawmakers were poised to vote.
Government spokesman Christos Stylianides said Prime Minister Anastasiades might also speak to Russian President Vladimir Putin, who had described the deposit levy as "unfair, unprofessional and dangerous."
But Russian authorities have denied rumours that the Kremlin might offer more money – possibly in return for a future stake in Cyprus's large but as yet undeveloped offshore gas reserves which have raised the island's strategic importance.
An influx of Russian money and influence since the collapse of the Soviet Union has led some Brussels officials to complain, privately, that Cyprus acts as a "Trojan donkey" for Moscow inside the EU.