CYPRUS dramatically rejected a crucial bailout last night, throwing the Eurozone back into turmoil and leaving the country’s politicians scrambling for a deal to save the tiny nation from bankruptcy and leaving the euro.
The €17bn (£14.5bn) deal was thrown out because the state could not agree on a new raid on savings accounts, leaving it €6bn short in the plan to recapitalise the country’s broken banks and support state spending until 2020.
It was left to the European Central Bank to offer extra liquidity support to prop up the banks for another few days while a solution is found.
And the state suspended markets and extended its bank holiday yesterday to stop more money flooding out of the struggling banks. There were rumours of impending capital controls last night.
Cyprus’ finance minister flew to Russia to beg for a bailout – they have close economic ties and Moscow loaned the state €2.5bn in 2011.
But Eurozone leaders refused to sanction any bigger bailout from their funds, arguing Cyprus cannot cope if it is given any extra debt.
The prolonged closure of banks pushed the UK to fly €1m (£0.85m) in cash to the island to aid forces personnel and their families.
It forms part of George Osborne’s vow that UK service personnel, their families and British civil servants on the island will not lose any money.
The initial plan was to take around €5.8bn from bank accounts, with deposits of under €100,000 being hit by a 6.7 per cent tax and larger accounts facing a 9.9 per cent raid.
Although politicians tried to soften that, pushing for no tax on smaller accounts and a tax of 15 per cent on larger deposits, the parliament rejected the package yesterday.
Not a single vote was cast in favour of the bailout scheme, with 36 votes against the plan and 19 abstentions.
Markets had already fallen over the day, but closed before the vote rejecting the package took place.
The uncertainty pushed the euro down against the dollar and sterling.
And stocks fell across Europe. The Eurostoxx 50 fell 1.24 per cent while fellow peripheral nation Spain saw its IBEX 35 drop 2.2 per cent on the day.
Analysts warned that either taking funds from Russia or failing to reach a deal could result in a euro exit.
“While Russian money could help Cyprus to avoid bankruptcy, it could be the nail in the coffin for Nicosia’s relationship with the rest of the EU,” said Kathleen Brooks from Forex.com.
“This would be the most volatile outcome for the markets.”