Cyprus turns down ‘unjust’ fiscal bailout

Island's move raises renewed doubts over fate of eurozone

The Washington Post

Lawmakers in Cyprus on Tuesday rejected a bailout plan that would have rescued the country’s banks but forced savers to chip in for the cost, throwing down a gauntlet to the rest of Europe over the financial fate of the tiny island nation.

The plan to save Cyprus’ collapsing banks but to charge depositors for the service proved so controversial that not one of the 56 members of the nation’s Parliament voted for it Tuesday evening. The rejection leaves the fate of rescue plans up in the air, with other European leaders so far unwilling to step in to save the country, where bank deposits tower over the rest of the economy.

Parliamentarians “feel and they think that it’s unjust,” Cypriot President Nicos Anastasiades said Tuesday.

The rejection leaves Cyprus, the International Monetary Fund and the rest of Europe in a standoff similar to previous bailout negotiations, with the Mediterranean island nation trying to navigate its local politics and possibly get a better deal for itself as the others stand firm on how much they want to commit to yet another eurozone nation mired in trouble.

The fate of the 17-nation currency union, meanwhile, again hangs in the balance, threatened by a country that constitutes just 0.2 percent of the euro bloc’s collective economy.

Throughout the crisis, European policymakers have tried to keep any country from leaving the eurozone. Losing a member would pose uncertain risks to the world financial system and be politically embarrassing to the major powers such as Germany and France that designed the currency union.

Overall, Cyprus needs about $20 billion — an amount equal to its annual economic output and a sum that, if all borrowed, would put the country’s finances on an unsustainable footing. The IMF’s internal rules do not allow the organization to make loans to Cyprus under those circumstances. Eurozone countries are hesitant to lend the full amount, as well.

As a consequence, the IMF, the eurozone and the European Central Bank want to cap the amount of international loans to Cyprus at about $12.5 billion and leave the country to come up with the rest. The deposit tax was one alternative for raising the money. It had the advantage of grabbing $2.2 billion to $3 billion from foreigners, many of them Russian, who own more than one-third of the money on deposit in Cypriot banks.

In a sign of the severity of the situation, Britain on Tuesday dispatched a military plane loaded with a million euros to Cyprus “as a contingency measure” for soldiers stationed at British bases in the country, in case they can’t access their savings in Cypriot banks, according to a British Defense Ministry spokesman.