Cyprus heads for cliffhanger parliamentary vote on deposits tax
* Parliamentary vote scheduled for 1600 GMT
* Ministers try to soften blow to small depositors
* Divisions in parliament threaten vote
By Michele Kambas and Karolina Tagaris
NICOSIA, March 19 (Reuters) - The government of Cyprus is hoping to push a divisive tax on bank deposits through parliament on Tuesday in a bid to stave off a default that could reignite the euro zone crisis.
Breaking with previous practice that depositors' savings were inviolable, euro zone finance ministers announced over the weekend a one-off tax on Cypriot bank accounts would be imposed as part of a 10 billion euro ($13 billion) bailout by the European Union.
The measure infuriated ordinary Cypriots, who staged noisy demonstrations in the capital, Nicosia.
Cypriot and euro zone officials have since sought to soften the initially proposed levy of 6.75 percent on depositors of up to 100,000 euros and 9.9 percent above 100,000 in order to ease the burden on small savers and overcome lawmaker opposition.
But passing the bill in parliament is still far from certain.
Tuesday's vote, originally planned for Sunday, has been postponed twice already in an effort to build consensus in a fractious parliament where no party has an absolute majority. Three parties have said outright they will not support the tax.
The initial proposal sent the euro and stock markets down and has infuriated ordinary Cypriots who say they are being forced to pay the price of the country's banking crisis.
Stunned islanders emptied cash machines over the weekend and banks are to remain shut on Tuesday and Wednesday to avoid a bank run. Hundreds of protesters rallied outside parliament on Monday, honking horns and holding banners saying "We are not your guinea pigs!"
"If they vote for this tax they will face the fury of the people," said Markos Economou, a 47-year-old physics teacher and father of two. "The banks and the politicians should pay for this mess, not the people."
Seeking to overcome divisions within the government's own ranks, ministers were scrambling on Monday to ease the pain for small savers by tilting more of the tax towards those with deposits greater than 100,000 euros.
Euro zone finance ministers were in favour of imposing a 15.6 percent levy on deposits of above 100,000 euros to help recapitalise Cyprus' financial sector while sparing depositors up to that level, officials told Reuters.
The government maintains that Cyprus has no choice but to accept the bailout with the levy on deposits, or go bankrupt.
While Brussels has emphasised that the measure is a one-off for a country that accounts for just 0.2 percent of European output fears have grown that savers in other, larger European countries become nervous and start withdrawing funds.
"If you're a small depositor in Cyprus you'll tell yourself that it would have been better to keep your money under the carpet than in a bank," said a French bank executive who declined to be named.
"And if you're a Greek, a Spaniard or an Italian, well, you'll tell yourself that you might be next."
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