Last weekend, Nico Anastasiades, the Cypriot President, accepted international aid in the form of a bailout from the EU and the IMF. One of the conditions of the proposed bailout was the introduction of a tax on bank deposits. It was felt that this is the least painful option for the country. It is believed Cyprus needs a bailout of €17 billion with €10 billion being used to recapitalise its banks. This decision was breaking previous bailout policy that views depositor’s savings as untouchable. The tax would have introduced a 9.9 per cent levy on deposits over €100,000 and 6.7 per cent on any deposits below this.

The eurozone is now facing an unprecedented situation

The levy was intended to be a one-off payment. The proposed tax led to public outrage and heavy withdrawals from cash machines. All electronic transactions were stopped and banks will remain closed until the Government decides to reopen them.

President Anastasiades had been pushing for a reduction to the three per cent levy on smaller investors while seeking to raise the levy on deposits over €100,000 to 12.5 per cent. The spokesman for Olli Rehn, the Commissioner for Economic Affairs, was of the opinion that a change to the levy amounts could be accepted as it would have the same financial impact.

Independent financial experts had highlighted the need for the Eurogroup and the European Central Bank to carry out the bailout impeccably as it could have possibly served as an outline for future bailouts for countries such as Spain and Italy. ECB president Mario Draghi has warned that, despite Cyprus being a small economy, there may be larger systematic risks.

These systematic risks may now become real problems as the Cypriot Government rejected the bailout terms by an overwhelming majority in an emergency session on Tuesday after being repeatedly postponed.

This is the first time a national government has rejected the conditions of financial assistance from the EU and the IMF.

Officials in the Cypriot Finance Ministry had previously begun talks with lenders as a second attempt to lessen the blow on the smaller savers. It is worth noting that depositors in Cypriot banks abroad would not have been affected by the levy.

As a result of Parliament’s rejection of the bailout, Cyprus is now turning to Russia for assistance to prevent a meltdown of the Cypriot financial sector.

Had the bailout been approved by the Cypriot Government, Russia would have been greatly affected. It is estimated that Russia has €19 billion deposited in Cyprus in the form of business with an additional €12 billion in Russian banks in Cyprus.

In addition, Russia had previously given Cyprus a loan of €2.5 billion. Negotiations are underway to extend this loan for another five years and to reduce the 4.5 per cent interest rate on the loan. Russia had expressed its frustration at not being included in the drawing up of the bailout terms to begin with.

Members of the European Parliament who sit on the Economic and Monetary Committee had expressed their discontent with the proposed conditions of the bailout. The Parliament had criticised the proposed bailout as removing the protection that was guaranteed to small investors and as damaging to the single market because the levy circumvents the European Union’s deposit guarantee laws. Economic analysts had also criticised the levy and noted that it could undermine public trust in the EU, especially when the creation of a banking union is a major issue.

Germany’s Finance Minister, Wolfgang Schaeuble, had not criticised the levy as the country has expressed concern over money laundering. In light of this, the Cypriot anti-money laundering framework will be subject to an independent audit. The European Summit, which took place last week in Brussels, did not reach any conclusion on the Cypriot bailout. Discussions were focused on the economy with a decision being taken on rules on procedure for the meetings.

The eurozone has now been thrown in a completely unprecedented situation. A solution to the Cypriot crisis is urgently required because there is a danger that the ECB will remove its support of Cypriot banks.

There is also concern about the effect that the rejection of the bailout will have on those other member States that are experiencing financial difficulties.

David Casa is a Nationalist MEP.