Cyprus's parliament on Tuesday rejected an unprecedented levy on bank deposits, a precondition for receiving a EUR 10 bn bailout from the eurozone, ECB and the IMF agreed Saturday. The rejection came despite the government revising the original bank levy plan, so as not to tax small savers with less than EUR 20.000 worth of deposits, while taxing depositors between EUR 20.000 and EUR 100.000 with a 6.75% rate and 9.9% for deposits above EUR 100.000.
Unless a new deal is reached shortly, Cyprus might face a collapse of its banking system and bankruptcy that could then lead to the country’s exit from the eurozone. The available options for Cyprus include: (i) another vote in the parliament over a revised tax levy; (ii) renegotiating of the deal with international creditors (the additional EUR 5.8bn, which was to come from the tax levy amounts to only 0.06% of eurozone GDP); (iii) support from Russia for Cyprus’s troubled banks (like for example an idea that Gazprombank, part of Russia’s energy giant, could take over and recapitalise Laiki, the second-largest Cypriot bank).
The rejection of the bailout deal means there is a risk of renewed turbulences in the eurozone debt crisis, which might continue to weigh on stock markets in the short-term. At the same time, imposition of the tax levy might have fuelled market concerns it would lead to capital flight in other eurozone periphery countries, threatening the stability of the eurozone financial system.
At the moment it seems investors are speculating that an outcome to Cyprus problems will be found shortly and the country will stay in the eurozone. As an important support for the markets came ECB, which reaffirmed its commitment to provide liquidity “as needed within the existing rules.” European stock futures rose Wednesday morning: Stoxx Europe 600 Index gained 0.8%, while Asian shares fluctuated around zero: Hang Seng up 0.1% as of 8:50 a.m. CET.