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Tuesday, March 19, 2013 - Page updated at 09:00 p.m.

Tiny Cyprus rattles markets with bailout-plan protests

By LIZ ALDERMAN
The New York Times

NICOSIA, Cyprus — The lights were dimmed and the doors were locked.

But inside a branch of Laiki Bank, one of Cyprus’ two dominant banks, a few silhouettes glided about Monday, filling cash machines to calm a wave of anxiety that has washed over this tiny island since European leaders took the unprecedented step Saturday of trying to force depositors to pay for part of an international bailout.

Outside, the ATM coughed up 50-euro bills, as few as two or four at a time — a relief, since banks will remain closed through Wednesday. Yet it was still not enough to assuage fears.

“How can I trust any bank in the eurozone after this decision?” asked Andreas Andreou, 26, an employee at a trading company.

“I’m lifting all my deposits as soon as the banks open. I’d rather put the money in my mattress.”

In this windswept capital, and in the halls of power elsewhere in Europe, much of the day was given over to cross-border arguing and a public reluctance for anyone to take responsibility — some might say blame — for a decision that suddenly seemed like it might not be such a great idea, after all.

“I’m not going to get into the issue of who did what,” said Reza Moghadam, the International Monetary Fund’s director for Europe, in a news conference Monday in Washington.

As a plan to tax deposits in exchange for a 10 billion euro financial lifeline for this troubled nation frayed nerves, it quickly set off tremors far beyond Cyprus’ shores.

Stock markets around the world fell Monday — although U.S. markets remained calm — amid the realization that Europe’s policymakers had made a significant departure from past efforts to keep the eurozone together.

Economists said the Cyprus plan set a worrisome precedent that could backfire. The plan “risks setting off a bank run and contagion,” said Michael Darda, chief economist at MKM Partners.

For the first time since the onset of the sovereign debt crisis in Europe and the bailouts of Greece, Portugal and Ireland, ordinary bank depositors — including those with insured accounts — were being called on to bear part of the cost, to the tune of 5.8 billion euros, about $7.5 million, of the 10 billion euro package.

The plan also would wipe out so-called junior bondholders in Cypriot banks, who would give up 1.4 billion euros in holdings.

Only senior bondholders, who have paid a premium to be first in line for repayment of their investments, would be fully protected.

Under the terms of Cyprus’ bailout, the government must raise 5.8 billion euros by levying a one-time tax of 9.9 percent on depositors with balances of more than 100,000 euros, or $129,500.

Those with balances below that threshold would pay 6.75 percent, an asset tax that would still hit pensioners and the lowest-income earners hard.

Cyprus’ president, Nicos Anastasiades, accused European Union leaders of using “blackmail” to get him to agree, and he sought Monday to compel policymakers in Brussels to soften the terms.

As lawyers in Cyprus questioned the legality of both taxing deposits that are supposed to be insured up to 100,000 euros, and confiscating sums above that, Anastasiades postponed a parliamentary vote on the package until Tuesday, as signs emerged that lawmakers might not approve.

In Brussels, the club of 17 eurozone finance ministers that had signed the bailout plan for Cyprus held an emergency conference call Monday evening and tiptoed back from terms of the arrangement, by agreeing to consider a new deal that could lighten the burden for less well-to-do Cypriots.

In a statement, they said small depositors “should be treated differently from large depositors” and said they were open to modifying the tax on those with less than 100,000 euros.

Cyprus’ banking association issued a statement calling on people to remain “calm,” saying it was ready to implement whatever measures were needed to protect the stability of the banking sector. The association said it would instruct banks to load automated teller machines with cash while banks remain closed.

The Cyprus Stock Exchange, which was also closed Monday as part of the declared bank holiday, will not reopen Tuesday or Wednesday.

Even though Russia is not a member of the euro currency union, its support of the plan was also considered essential because of the large amount of Russian funds held by Cypriot banks.

But President Vladimir Putin on Monday described the bailout plan as “unfair, unprofessional and dangerous.”


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