Cyprus government considers capital restrictions if banks reopen in wake of no vote on bailout plan

Move would attempt to stop money flowing out of the country

Protestors shout slogans during a rally against a tax levy on deposits (EPA)

The Cypriot government is considering whether to allow banks to reopen tomorrow and could impose capital restrictions if they do, according to a senior government official.

"At the moment the issue is if and how banks will reopen tomorrow. Capital restrictions being considered," the anonymous official said in a text message to Reuters.

The move would attempt to address concerns that money could flood out of the country when banks do finally repoen.

Cyprus stood on the brink of bankruptcy this morning after its parliamentarians voted down a bailout deal that would have taxed ordinary savers yesterday. The decision sets up a showdown with its European creditors who are insisting that the island contribute to its rescue package or risk going bust.

The Cyprus government and central bank were said to be working on an alternative proposal to come up with billions of euros in funds to stave off bankruptcy.

Government spokesman Christos Stylianides said a meeting was underway at the central bank to discuss a 'Plan B' for raising funds, but also for reducing the €5.8 billion (£5 billion) that must be found domestically.

In order to qualify for €10bn promised by the International Monetary Fund (IMF), the European Central Bank (ECB) and eurozone finance ministers, Cyprus had to approve yesterday's plan.

President Nicos Anastasiades had warned that a “no” vote could lead to financial chaos and an eventual exit from the single currency.

Officials say it is just a matter of weeks before the government runs out of money, leaving it unable to cover civil servants' salaries or welfare payments. Underlining the sense of panic, the British Government announced that it was sending a Royal Air Force plane loaded with €1m to provide emergency loans to British troops, as banks on the island remained closed and cash machines ran out of money.

Just hours before parliament met to debate the measures, President Anastasiades had put forward new proposals in an effort to win over MPs.

The new plan would have seen anyone with less than €20,000 in the bank exempt from the tax. The move was a departure from the agreement reached in Brussels over the weekend, which stipulated that all deposits would be charged. Those with between €20,000 and €100,000 would have lost 6.75 per cent of their savings, while those with over €100,000 would have faced a 9.9 per cent tax. But even this amendment was not enough to convince lawmakers, 36 of whom voted against the measures, with the other 19 abstaining.

Cyprus needs as much as €17bn to pull back from the brink after its bloated financial sector was hard hit by the crisis in Greece. The troika of the IMF, the ECB and the EU have pledged €10bn in assistance, but only if the Cypriots come up with €5.8bn themselves. They have also threatened to withdraw ECB emergency funding from two stricken banks. This funding is key to Cyprus's immediate future. If it disappears, the island's two largest banks will go bust, triggering a fresh crisis that could force Cyprus out of the euro. Tonight the ECB pledged to continue providing funding “within the rules”, but given its earlier threats the statement was met with scepticism in financial circles.

The Cypriot government is now faced with a tough choice - return to the troika and try and renegotiate the terms of the bailout, or attempt to find other sources of finance, possibly from Russia. Zsolt Darvas, a research fellow at the Brussels-based Bruegel think tank, said they were unlikely to find a sympathetic ear among the eurozone finance ministers. “I think the eurogroup would be extremely tough,” he said. The Cypriots' position is not helped by concern that when the banks reopen - which is due to happen tomorrow - money could flood out of the country.

EU officials claim Russia is unlikely to provide anything near the level of assistance Cyprus needs. President Anastasiades has also been unwilling to contemplate a higher tax on deposits over €500,000, fearing a flight of large foreign investors from the country.

The Cypriot speaker, Yiannakis Omirou, said that political leaders would meet President Anastasiades today to discuss the next steps, but lawmakers stressed that they wanted any tax on savings removed from the deal .“It has not been (implemented) in any other country in Europe and we don't wish to be [an] experiment,” said Nicholas Papadopoulos, the chairman of the parliamentary finance committee.

In a statement on Monday, eurozone finance ministers said they were willing to tweak the deal to lessen the burden on small savers, but that Cyprus's contribution had to remain at €5.8bn. The new proposals put forward this morning did not reach that figure.

In the bank: Anastasiades assets

When the Cypriot parliament rejected a one-off tax on savings held in its banks, President Nicos Anastasiades may well have breathed a sigh of relief.

The president has said that the tax is necessary to avoid the eventual collapse of Cyprus’s financial system, but with personal assets reportedly in the millions of euros, Anastasiades is among those who would have been hit by the levy.

According to his 2011 earnings –declared in January – his combined wealth adds up to over €2.3m (£2m).

An audit by KPMG found the president owned property worth €835,000, shares in private companies worth €10,497 and a collection of cars valued at over €115,000.

Perhaps most importantly though for Cypriots fearing a raid on their savings, Anastasiades has bank deposits of €706,527. That would mean a total of €70,652 would have been appropriated from his account if the parliament had passed the controversial law.