The Cyprus stock exchange has suspended trading for Tuesday and Wednesday as the nation's banks remain closed and its lawmakers debate a controversial depositors tax linked to a critical multi-billion euro bailout.
The closure keeps the tiny Mediterranean economy on virtual lock-down ahead of a knife-edge vote in parliament that will test newly elected President Nicos Anastasiades' ability to convince his political rivals that they must include depositors in a so-called "bail-in" of the country's massive banking system in order to secure around €10bn in rescue funds from the European Union and avoid a catastrophic banking sector collapse.
Late Monday, the Eurogroup of Eurozone finance ministers issued a statement following an emergency teleconference in which they reiterated their view that the proposed tax on savers in Cyprus, which will be used to fund a large portion of the financial rescue, should be considered a one-off measure that will not apply to future adjustment programmes around the single currency area.
The Eurogroup also insisted that it had not demanded a so-called "haircut" on small depositors in Cyprian banks and that the government was well within its rights to structure the proposed tax in fairer and more progressive fashion.
"The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below €100,000," the statement said. "The Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on 16 March, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance up to €10bn."
Eurozone finance ministers agreed on Saturday to impose a 6.75 percent level on all bank deposits in Cyprus up to €100,000 and a further 9.9 percent on those above the insured threshold. The tax, which has never been applied in any of the four previous eurozone bailouts, is expected to raise around €5.8bn, the leaders said, or 30 percent of Cyprus' tiny GDP. Around a third of the deposits are held by non-Cypriots, analysts with Barclays have estimated.
Depositors will receive shares to compensate for the tax, according to draft terms of the bailout, that will be underpinned by future revenues from the nation's developing natural gas sector.
Lawmakers are said to be attempting to change the terms of the deposit tax, according to several media reports - first published by the Wall Street Journal - with suggestions that the levy on deposits under €100,000 be lowered to 3 percent and the upper threshold raised to 13 percent. Reuters has reported a government spokesperson suggesting an exemption on deposits of €20,000 or less.
Anastasiades may struggle to convince his Parliamentary colleagues that the tax, which applies for the first time to insured deposits in the nation's banks, is an unavoidable portion of a €10bn financial aid package necessary to avoid a collapse of the country's banking system. His centre-right Disy party holds 20 seats in the 56-seat chamber and needs a further 9 seats from political rivals Akel and Edek, both of which have vowed to oppose it.
Lawmakers will vote on the deal at 16:00 GMT Tuesday in Nicosia.