ATHENS -- Scrambling to stave off a chaotic government default and exit from Europe’s single currency club, Cyprus’ beleaguered government on Tuesday proposed a revised plan to shield small account holders from a divisive tax on bank accounts, hoping to dampen discontent and secure vital international funding for its faltering banks.
The move comes hours before a planned parliamentary vote that could determine whether the near-bankrupt island will accept the contentious terms of a $13-billion bailout offered by Europe and the International Monetary Fund or potentially go it alone.
Senior government officials and state media in Nicosia, the capital of Cyprus, said the revised plan exempted deposits of as much as $26,000 from the proposed levy. Instead the proposal calls for Cypriots with savings of between $26,000 and $130,000 to be subject to a 6.75% one-time tax, part of an agreement with international lenders to raise some $7 billion, officials familiar with the talks said Tuesday.
Under the amended plan, the officials added, amounts above $130,000 would be taxed at a rate of at least 9.9%.
Although the proposal retreated from an initial plan announced Saturday to tax private and corporate accounts of all amounts, it remained at the center of fierce debate both on the island and beyond its shores.
Whether the watered-down deal would be put to a vote Tuesday by Cypriot lawmakers remained unclear, officials and analysts in Nicosia said, rekindling fears of renewed economic turmoil across Europe and global financial markets.
Legislators have twice postponed a vote on levying the savings tax, sending streams of depositors to ATMs to empty their accounts.
Still, as Finance Ministry experts on Tuesday pored over details of the revised deal and ruling party lawmakers scrambled to sway opposition parliamentarians before the vote, Finance Minister Michalis Sarris prepared for what analysts and Cyprus media dubbed Plan C -- seeking financial salvation from Russia rather than Germany and the European Union.
“If he plays the government’s cards right," said Michalis Michail, a political analyst in Nicosia, “Cyprus could convince Moscow to come to the island’s rescue.”
Russia last year gave Cyprus a $3.1-billion loan at a below-market interest rate to help keep Cyprus and its banks afloat. The Cypriot banks are favored havens for the money of many Russian oligarchs.
Sarris was set to visit Moscow on Monday to try to stretch out the repayment terms of the initial deal, hoping also to solicit a new loan from the Kremlin. But after the government’s surprise announcement of the deposit tax -– which Russian President Vladimir Putin called “unjust, unprofessional and dangerous” -- the meeting was pushed back to Tuesday.
Any chance of wooing Russian support may have been seriously diminished after the tax levy decision stoked anxiety among the island’s estimated 30,000-strong Russian expatriates, their army of accountants and attorneys.
“Cyprus used to bend over backwards to accommodate high-flying Russian businessmen,” said Fiona Mullen, a leading financial analyst in Nicosia. “Now it’s being seen as taking punitive action against them, and that has Moscow mad.”
“If Sarris had a difficult job on his plate in trying to salvage the first loan deal on Monday," Mullen said, "he’s unlikely to make major headway and get extra money from the Russia now on Tuesday.”
But if he does, that helping hand could put the island on a collision course with the European Union, a club of nations that Cyprus joined nearly a decade ago to bolster its sense of security against Turkey and the 35,000-strong occupational force Ankara retains on the northern third of the divided island.
“Cyprus really needs to make up its mind where it belongs,” Mullen said. “The hope is that its lawmakers will stare into the abyss today or whenever the vote takes place, and go for the less painful option: to side by Europe and avoid a devastating default.”