Cypriot lawmakers may shoot down an unprecedented levy on bankdeposits, risking the island's membership in the euro.

The “feeling I'm having is that the house is going to reject itbecause they feel and think it isn't just and that it's against theinterest of Cyprus,” Cypriot President Nicos Anastasiades toldSweden's TV4 channel in an interview today.

The Mediterranean island nation's banks and stock exchange willremain closed at least until March 21 amid speculation lawmakersmay postpone the vote that's planned for later today. The 5.8billion-euro ($7.5 billion) raid on bank accounts, intended to cutthe cost of a rescue package to 10 billion euros, sparked outragewhen Cypriots woke March 16 after marathon talks in Brussels tofind bank transfers blocked.

Finance chiefs from the 17-member euro area late yesterday urgedCyprus to spare small-scale savers, while keeping unchanged thesize of their demand on account holders. While Cyprus accounts forless than half a percent of the euro economy, the fight over thebank tax risks triggering new turmoil in the financial crisis thatbegan in 2009 in Greece.

“I don't think about plan Bs,” French Finance Minister PierreMoscovici said in Paris today. “We're in a plan A. Everyone has toassume his responsibilities.”

Finance ministers backtracked on the levy's structure, whichinitially called for a 6.75 percent tax on deposits under 100,000euros and 9.9 percent over that amount. The levy should now be moreprogressive, though must yield the same amount.

“Things were confused” after the measures was announced,Moscovici said. “The perception was confused. Once this confusionwas born, we had to revisit the decision.”

The euro, which tumbled 0.9 percent yesterday, traded littlechanged today at $1.2934 as of 11:54 a.m. Frankfurt time. Europeanstocks fell for a third day, with the Stoxx Europe 600 Index down0.4 percent. Spanish 10-year bonds fell, with the yield climbing toas high as 5 percent.

European policy makers would consider ramping up pressure onCyprus in the event of a breakdown over the deposit tax, whichMoscovici called breaking a “taboo,” said a European official whoasked not to be named. Among the potential measures is cutting offfunds to the nation's banks through the European Central Bank'sEmergency Liquidity Assistance program.

“There is no precedent for what would happen if Cyprus rejectedthe conditions,” Holger Schmieding, chief economist at BerenbergBank in London, wrote in a note. “Our best guess is that Europewould give Cyprus a brief and final chance to rethink and voteagain.”

A complete rejection of the measure would forego Europeanassistance and could lead to a sovereign default, or even an exitfrom the currency union, Schmieding said.

'Serious Blunder'

“What we have seen in the last few days is a very seriousblunder by European governments that essentially are blackmailingthe government of Cyprus to confiscate the money that belongsrightfully to depositors,” former Cyprus central banker AthanasiosOrphanides said today on “Bloomberg Surveillance” with Tom Keene.“It's not clear how this can affect in a positive manner theEuropean project going forward.”

Once banks on the island reopen, the country could see more than7 billion euros in outflows, or about 10 percent of the total,state-run RIK TV cited Central Bank Governor Panicos Demetriades astelling a parliamentary committee.

Anastasiades was rebuffed in a call to German Chancellor AngelaMerkel yesterday. Merkel told him that he can only negotiate arescue with the so-called troika, which comprises the EuropeanCommission, the ECB and the International Monetary Fund, accordingto a German government official.

The bank levy and additional tax measures reduced the overallrescue package to 10 billion euros from about 17 billion euros tomeet the IMF's demand for debt sustainability and Germanpoliticians' skepticism over financial transfers.

German Finance Minister Wolfgang Schaeuble said there was noother option if the troika wanted to keep the price tag for thebailout at 10 billion euros.

“Naturally, the Cypriot president tried to find a way around it,but there was none,” Schaeuble said in an interview onDeutschlandfunk today. He added that the levy doesn't violatedeposit guarantees, because such protections are “only as good as astate's solvency.”

Anastasiades, whose Disy party holds 20 seats in the country's56-seat legislature, will need the support of other politicalfactions, some of which have said they'll vote no.

The decision, unveiled at a 4:30 a.m. press conference inBrussels on March 16, set off a wave of criticism from investorsand officials that a bank run could spark a return to market panicthat's been a hallmark of the euro crisis.

Russian President Vladimir Putin called the tax “unfair,unprofessional and dangerous,” according to a statement posted onthe Kremlin website. Russian companies and individuals have $31billion of deposits in Cyprus, according to Moody's.

The U.S. Treasury Department is “monitoring the situation inCyprus closely,” and Secretary Jacob J. Lew has been speaking withhis European counterparts, the department said in an e-mailedstatement yesterday.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.