The German government insisted yesterday it had not demanded that Cyprus hit ordinary depositors as the price of its eurozone bank rescue, pointing the finger of blame instead at the government in Nicosia and the institutions of the eurozone.
In signs of schism among the single currency bloc's leadership, the German finance minister, Wolfgang Schäuble, insisted that Berlin had been in favour of "respecting" the pan-eurozone deposit guarantee and said the surprise levy on modest savers had been the idea of the Cypriot government, along with the EU and the European Central Bank.
Cyprus yesterday postponed a parliamentary vote on the bailout terms until 6pm today, amid a public backlash against the levy on small savers and fears that the move could trigger financial contagion across the southern eurozone. The vote is reported to be on a knife edge. The country's central bank yesterday announced that banks would remain closed until Thursday in order to prevent panic withdrawals.
The euro slid when markets opened and European banking stocks sank, although they later recovered most of the lost ground. Analysts warned that further falls could follow if the rescue package was rejected by the Cyprus parliament.
John Higgins at Capital Economics said: "Concerns about the potentially disastrous financial and economic consequences of bank runs could continue to weigh on share prices. And the return of fears that Cyprus may actually leave the eurozone altogether could lead to a sustained correction in the prices of riskier assets generally, including equities."
In an apparent softening of the ECB's line, Jorg Asmussen, a German member of the central bank's governing council, yesterday said Nicosia was free to shift the burden of the "bail-in" further away from small savers to larger ones. "It's the Cyprus government's adjustment programme" he said. "If Cyprus's president wants to change something regarding the levy on bank deposits, that's in his hands. He must just make sure that the financing is intact."
Germany had gone into negotiations on the Cyprus bailout insisting that the eurozone states would provide only €10bn (£8.6bn) to rescue the country's tottering banks, and that Nicosia needed to find the rest of the €16bn needed to stabilise its outsized financial sector. Under the original proposal those with savings of less than €100,000 in Cypriot banks would face a compulsory 6.7 per cent levy on their savings, while those with more would face a 9.9 per cent levy. In return they would receive equity in the bank. This is the first time that ordinary savers have been required to contribute to a eurozone bailout.
Some of Cyprus's largest bank depositors are Russian, and accusations abound that the island nation serves as a tax haven for laundered money. Cypriot banks have assets and liabilities equivalent to 700 per cent of the country's GDP and banking is its second largest industry after tourism.
There were reports yesterday that the authorities in Nicosia were considering reducing the levy on deposits under €100,000 to 3 per cent, at the same time raising the levy on larger amounts to 12.5 per cent.
Eurozone ministers held a teleconference call last night to discuss the fallout from the Cyprus affair.