NICOSIA, Cyprus – The Cypriot government sought Tuesday to shield small savers from a plan that is intended to raise €5.8 billion ($7.5 billion) toward a financial bailout by seizing money from bank accounts.
The plan, which is part of a larger bailout package being negotiated with other European countries, has been met with fury in Cyprus and has sent jitters across financial markets.
Banks in Cyprus will stay shut until Thursday to prevent a bank run before Parliament has backed the plan to seize a percentage of bank deposits. If the bill goes through some savers could still try to get their money out.
Just hours ahead of the expected debate and vote in the country's 56-member Parliament, officials sought to limit the impact on small savers. They also hinted that the country was looking to limit the amount it has to raise from the grab on deposits. The new plan would leave a shortfall in the amount Nicosia has been told it must raise.
About 300 protesters gathered outside parliament, which was cordoned off by police.
A vote in favor of the bank account confiscation is needed if Cyprus is to get €10 billion ($12.9 billion) in rescue loans from its euro partners and the International Monetary Fund. The money will be used to prop up its banks.
A new draft bill discussed in Parliament's finance committee proposed to spare all deposits below €20,000 ($25,900). Those between €20,000 and €100,000 ($129,290) would still have a 6.75 percent charge imposed, and those above €100,000 would have to give up 9.9 percent of their deposits, in line with the original plan put forward over the weekend.
In a sign of the scale of disagreement over the deposit charge, the country's central bank governor, Panicos Demetriades, recommended that no accounts below €100,000 be touched. That level represents the amount of savings that are supposed to be insured if a bank collapses.
"The credibility of, and trust in the banking sector depends on this," said Demetriades, who conceded that he expects at least 10 percent of deposits to be withdrawn when the banks eventually re-open.
Failure to pass the bill could mean no bailout money from the eurozone and IMF and lead to Cyprus's bankruptcy, which could reignite concerns in financial markets over the single currency's future. That would likely put deposits in the country's banks under even more threat.
Although Cyprus is the smallest eurozone country to be bailed out, the details of the plan sent shockwaves through the single currency area as it was the first time savers' banks accounts have been directly targeted. Other bailed out countries such as Greece, Ireland and Portugal have raised funds by imposing new taxes.
Proponents of the deposit seizure argue that this way gets foreigners who have taken advantage of Cyprus's low-tax regime to share the cost of the bailout of the banks, which have been hit hard by their over-exposure to bad Greek debt.
About a third of all deposits in Cypriot banks are believed to be held by Russians.
Finance Minister Michalis Sarris was flying to Moscow Tuesday afternoon to meet with his Russian counterpart. Andreas Charalambous, a senior official at the ministry, said the aim is to extend repayment of a €2.5 billion loan Russia granted Cyprus in late 2011 when the country could no longer borrow from international markets.
But he admitted there was a bigger ambition than just an extension of the loan and that Cyprus is looking for "potential interest for further investment in the country."
Opponents say a blanket charge on people's bank accounts will hurt ordinary Cypriots more, and could shake the confidence of all in the country's banking sector. And by going after deposits, European policymakers have set a precedent that could be repeated in the future. The worry of bank runs across Europe lies at the heart of market concerns.
Charalambous said Cypriot authorities believe depositors should be protected, but that a wholesale exemption for those below €100,000 would mean a "disproportionate" burden on large savers, and a "very detrimental" knock-on effect on economic growth.
"Because of the size of the estimated (bailout) needs, the burden on those above €100,000 would be such that it would again impact small people because it would destroy the ability of the country to attract foreign investment," Charalambous said.
In a Monday night teleconference, eurozone finance ministers concluded that small depositors should not be hit as hard as others. They said Cyprus should stagger the seizures more, but insisted that the overall take should stay the same.
President Nicos Anastasiades, who was elected less than a month ago, told German Chancellor Angela Merkel Monday night that "the possibility of reducing the requirements from self-raised funds is being explored," a Cypriot government spokesman said.
The two leaders were expected to speak again on Tuesday, he added.
Christine Lagarde, the head of the International Monetary Fund which is participating in Cyprus's bailout, said in Frankfurt that the IMF was "extremely supportive of the Cypriot authorities' intentions to introduce more progressive rates in the one-off tax."