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Cyprus rethinks EU bailout package after angry backlash

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(Globalpost/GlobalPost)

Cyprus was Tuesday revisiting a bailout package hours before a parliamentary vote on the deal after the eurozone urged a rethink on a controversial levy on bank deposits that sparked outrage at home and roiled global markets.

Officials said parliament's finance committee was meeting to re-examine a bill giving effect to the 10-billion-euro ($13 billion) sovereign bailout after eurozone ministers on Monday urged that small savers be spared the tax.

Fearing a run on accounts, Cyprus has shut its banks until at least Thursday, with the local stock exchange closed for the same period.

A parliamentary vote on the bill scheduled for Monday was now to begin at 1600 GMT Tuesday. President Nicos Anastasiades has called on all parties to back the bailout, warning that the island faces bankruptcy if it is rejected.

The planned levy on bank savings was agreed on Saturday by the eurozone partners in exchange for a 10-billion-euro ($13 billion) sovereign bailout deal for Cyprus.

Under the accord, Cyprus agreed to impose a levy of 6.75 percent on bank accounts up to 100,000 euros and 9.9 percent for larger deposits. The move was aimed at raising 5.8 billion euros for the government.

But faced with a public backlash that spooked global markets, eurozone finance ministers told Cyprus on Monday to take another look at the proposal.

Eurogroup President Jeroen Dijsselbloem of The Netherlands said ministers "continue to be of the view that small depositors should be treated differently from large depositors".

French Finance Minister Pierre Moscovici revealed Tuesday the eurozone had unanimously agreed that the levy should not apply to bank deposits in Cyprus below 100,000 euros.

But the Eurozone finance ministers said there would be re-negotiations to "introduce more progressivity in the one-off levy", in other words increasing the tax rate on bigger holdings to ensure the same 5.8-billion-euro return.

A eurozone source spelled out that this would mean preferably removing altogether the mooted 6.75-percent levy applied to smaller accounts, which combined amount to more than three fifths of all Cypriot savings, despite some 30 billion euros attributed to large Russian investors.

The move came as analysts suggested the European Union had shot itself in the foot with the bank levy decision and media lampooned "the Great Euro Bank Robbery".

The economic and political fallout was huge following the announcement that a raid on savings would be required as part of the fifth eurozone bailout of the three-year debt crisis.

Moscow, which has an outstanding 2.5 billion euro loan to Cyprus and billions more in deposits in the island's banks, reacted angrily to the EU levy.

Russian President Vladimir Putin slammed the "dangerous" move and turmoil hit stock and currency trades on Monday amid concerns that a precedent had been set for bigger debt-saddled eurozone economies such as Italy and Spain.

Estimates vary but the Moody's rating firm estimates that Russian companies and banks keep up to $31 billion in Cyprus, which accounts for between a third and half of all Cypriot deposits.

Cypriot Finance Minister Michalis Sarris headed Tuesday to Moscow for what looked certain to be awkward talks -- two days before the head of the European Commission, a member of the bailout "troika," also lands in Moscow to meet Prime Minister Dmitry Medvedev.

After markets suffered losses on Monday, Asian bourses rebounded early Tuesday as news spread that Cyprus was reworking the controversial savings levy.

Tokyo stocks led the way, closing 2.03 percent higher.

The euro also rebounded in Asia, fetching $1.2961, up from $1.2957 in New York on Monday.

Hundreds of protesters gathered outside the parliament building in Nicosia on Monday to register their anger at the unprecedented tax, not asked of other eurozone countries that have sought rescue. More protests were expected in Nicosia on Tuesday.

"Wake up, they are sucking our blood," demonstrators called to their fellow Cypriots.

"If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system, they could not have done a better job," said CMC Markets analyst Michael Hewson.

Washington called for a "responsible and fair" resolution of the crisis.

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http://www.globalpost.com/dispatch/news/afp/130319/cyprus-rethinks-eu-bailout-package-after-angry-backlash