Cyprus' crucial bailout deal at risk as the country drops a divisive levy on deposits below 20,000 euros.
Cyprus dropped a controversial levy on bank savings below 20,000 euros ($A25,000), sparking a warning by the central bank governor that the crucial eurozone bailout deal was now in danger of collapse.
Panicos Demetriades's warning came as International Monetary Fund chief Christine Lagarde urged Cyprus to meet its commitments under the 10 billion euros deal sealed with eurozone partners at the weekend.
The revised plan, drafted in response to an angry backlash at home and jitters that roiled global markets, sees a one-time levy being dropped on bank savings below 20,000 euros but retained at 6.75 per cent on deposits of 20,000-100,000 euros and at 9.9 per cent for amounts above 100,000.
Given the amendments to the bill, the tax which was originally to have applied to all bank deposits 'will not yield the estimated 5.8 billion euros agreed by the Eurogroup,' Demetriades told parliament's finance committee.
'If we secure 5.5 billion it will be considered in breach of the agreement and perhaps will not be accepted,' he said, as cited by the Cyprus News Agency.
The bill was to be voted on later Tuesday by parliament, whose stamp of approval is crucial for the bailout deal to go ahead.
President Nicos Anastasiades has called on all parties to back the bailout, warning that the island faces bankruptcy if it is rejected.
Fearing a run on accounts, Cyprus has shut its banks until at least Thursday, with the local stock exchange closed for the same period.
The planned levy on bank savings was agreed during the negotiations for the sovereign bailout deal for Cyprus.
Under the original accord, Cyprus agreed to impose a levy of 6.75 per cent on bank accounts up to 100,000 euros and 9.9 per cent for larger deposits. The move was aimed at raising 5.8 billion euros for the government.
But faced with a public backlash that spooked global markets, eurozone finance ministers told Cyprus on Monday to take another look at the proposal.
Eurogroup President Jeroen Dijsselbloem of The Netherlands said ministers 'continue to be of the view that small depositors should be treated differently from large depositors'.
The Eurozone finance ministers said there would be re-negotiations to 'introduce more progressivity in the one-off levy', in other words increasing the tax rate on bigger holdings to ensure the same 5.8-billion-euro return.
However, the Cypriot authorities, wary of seeing a flight of capital from the debt-hit Mediterranean island, opted to leave the maximum tax at 9.9 per cent, according to an amended tax bill seen by AFP.
Lagarde, speaking in Frankfurt before the revised bill was made public, said the IMF was 'extremely supportive of the Cypriot authorities' intentions to introduce more progressive rates' on taxing bank deposits.
She said it was now up to Cyprus to make good its commitments.
'It's time to deliver,' Lagarde told a financial congress.
Cypriot Finance Minister Michalis Sarris has headed to Moscow after an explosion of anger in Russia at the EU bailout deal for the island that could see Russian investors lose billions of euros.
Moscow, which has an outstanding 2.5 billion euro loan to Cyprus and billions more in deposits in the island's banks, reacted angrily to the EU levy.
Russian President Vladimir Putin slammed the 'dangerous' move and turmoil hit stock and currency trades on Monday amid concerns that a precedent had been set for bigger debt-saddled eurozone economies such as Italy and Spain.
Estimates vary but the Moody's rating firm estimates that Russian companies and banks keep up to $31 billion in Cyprus, which accounts for between a third and half of all Cypriot deposits.
