Last Updated Mar 19, 2013 3:32 PM EDT
NICOSIA, Cyprus Cypriot lawmakers on Tuesday rejected a critical draft bill that would have seized part of people's bank deposits in order to qualify for a vital international bailout, with not a single vote in favor.
The rejection leaves Cyprus's bailout in question. Without external funds, the country's banks face collapse and the government could go bankrupt. Nicosia will now have to come up with an alternative plan to raise the money: the government could try to offer a compromise bill that would be more palatable to lawmakers.
The bill, which had been amended Tuesday morning to shield small deposit holders from the deposit tax, was rejected with 36 votes against and 19 abstentions. One deputy was absent.
"No to new colonial bonds, no to subjugation, no to national dishonor and raw blackmail," said house speaker Yiannakis Omirou during the debate before the vote.
After the vote failed, he said political leaders will have a meeting with the president on Wednesday to discuss the next steps.
Nicholas Papadopoulos, the chairman of the parliamentary finance committee, said banks would remain closed "for as long as we need to conclude an agreement" but stressed this would be "in the next few days." Banks had been ordered to remain shut until Thursday while the bill was debated and amended, to prevent a bank run.
Papadopoulos said Cyprus wanted wants a renegotiation of its bailout deal.
But the idea of seizing savings was something Cyprus rejected. "It has not been (implemented) in any other country in Europe and we don't wish to be the experiment of Europe."
Hundreds of protesters outside Parliament cheered in jubilation and sang the national anthem when they heard the bill had not passed.
Under the original deal reached in Brussels late Friday to qualify for the 10 billion euro bailout from other eurozone countries and the International Monetary Fund, Cyprus had to raise 5.8 billion in additional funds by taxing all bank accounts. Those under 100,000 euros would pay 6.75 percent, and those above that amount would be taxed at 9.9 percent on their deposits.
Facing fury at home and from Russians who make up an estimated third of the total amount in Cypriot banks, the government amended the bill Tuesday to exempt small depositors with up to 20,000 in the bank.
But the change was not enough for lawmakers.
The country's central bank governor, Panicos Demetriades, had recommended that no accounts be taxed below 100,000 euros the amount that are supposed to be insured by the state if a bank collapses.
"The credibility of, and trust in the banking sector depends on this," said Demetriades.
Although Cyprus is the smallest eurozone country to be bailed out, the details of the plan had 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 argued it would have made foreigners who have taken advantage of Cyprus's low-tax regime share the cost of the bailout of the banks, which have been hit hard by their over-exposure to bad Greek debt.
Finance Minister Michalis Sarris flew to Moscow Tuesday afternoon to meet with his Russian counterpart, arriving there shortly before the vote and promptly dismissing rumors that he had offered to resign in the interim.
Andreas Charalambous, a senior official at the ministry, said the aim is to extend repayment of a euro2.5 billion loan Russia granted Cyprus in late 2011 when the country could no longer borrow from international markets.
He said Cyprus was also 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 euro100,000 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 euro100,000 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.