UPDATE 3-Cyprus parliament ready to veto deposit tax

Tue Mar 19, 2013 4:42am EDT

* Parliamentary vote scheduled for 1600 GMT

* Bank levy unlikely to pass - govt spokesman

* Ministers try to soften blow to small depositors

* Cypriot, Russian presidents due to talk

By Michele Kambas and Karolina Tagaris

NICOSIA, March 19 (Reuters) - Cyprus's parliament was set to reject a divisive tax on bank deposits in a vote scheduled for Tuesday, a government spokesman said, a move that would push the island closer to a default and banking collapse.

A weekend announcement that Cyprus would break with previous practice and impose a levy on bank accounts as part of a 10 billion euro ($13 billion) EU bailout prompted some turmoil on European financial markets on Monday.

Cypriot and euro zone officials have 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 to ease the burden on small savers.

But passage of the bill in the 56-member chamber, where no party has a majority, was unlikely and it was not clear if the vote would even go ahead later on Tuesday if leaders were sure it would be rejected.

"It looks like it won't pass," Cypriot government spokesman Christos Stylianides told state radio.

The House of Representatives was expected to meet at 1600 GMT. Rejection of the measure would effectively block a bailout that Cyprus needs to keep its banks afloat and government paying wages and welfare.

Tuesday's vote, originally planned for Sunday, has been postponed twice already. Three parties have said outright they will not support the tax, while a fourth, in the co-governing coalition, said it cannot support it as it stands either.

Cypriot President Nicos Anastasiades asked the EU for more aid during a telephone conversation with German Chancellor Angela Merkel on Monday, with a second call likely on Tuesday.

Stylianides said Anastasiades may also speak to Vladimir Putin, the Russian president.

French Finance Minister Pierre Moscovici said the bailout was the maximum that could realistically be expected to be paid back. "Above 10 billion euros we are entering into a size of debt that is not sustainable," he told reporters.

The tax will batter not only Cypriots, but thousands of Europeans and Russians with business interests on the island. Putin on Monday described it as "unfair, unprofessional and dangerous."

Cypriot Finance Minister Michael Sarris was due to hold meetings in Moscow on Wednesday, partly to try and get an extension to an existing 2.5 billion euros loan.

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."

The island's stock exchange also suspended trading for another two days.

International market reaction has been muted so far but if a vote was lost, or postponed, that could change. The uncertainty saw the euro drop 0.2 percent as it remained near a three-month low and European shares fall 0.4 percent in early trade.

ONE-OFF?

Seeking to overcome divisions within the government's own ranks, ministers scrambled 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.

It was not clear what version of the levy would eventually be voted on in Cyprus. The government maintains Cyprus has no choice but to accept the bailout with the levy, 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 will be spurred to withdraw 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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