MercoPress. South Atlantic News Agency

Germany warns Cyprus ‘banks might never reopen’ if terms of bailout are rejected

Cypriot parliament rejected a one-off tax on bank deposits, one of several bailout conditions

Germany's finance minister has warned Cyprus that its crisis-stricken banks may never be able to reopen if it rejects the terms of a bailout. Wolfgang Schaeuble said major Cypriot banks were “insolvent if there are no emergency funds”.

He was speaking after the Cypriot parliament rejected an international bailout deal that would have imposed a one-off tax on bank deposits. Frantic talks are under way to try to agree an alternative plan.

Leaders of political parties in Cyprus are due to meet later after parliament rejected the controversial levy, proposed as part of a 10bn-Euro bailout package.

Not a single MP voted in favour of the controversial deal, sending a clear message to Brussels that the strategy needs a drastic rethink, our correspondent adds.

Late on Tuesday, Mr Schaeuble said that he “regretted” the vote.

”The ECB (European Central Bank) has made it clear that without a reform programme for Cyprus the aid can't continue. Someone has to explain this to the Cypriots and I think there's a danger that they won't be able to open the banks again at all,“ he said.

”Two big Cypriot banks are insolvent if there are no emergency funds from the European Central Bank,” Mr Schauble added.

Cypriot President Nicos Anastasiades called the talks between party leaders when it became clear that the measure would not be passed by parliament. Fearing a run on accounts, Cyprus has shut its banks until at least Thursday. The local stock exchange also remains closed.

Cyprus' banks were badly exposed to Greece, which has itself been the recipient of two huge bailouts.

The rescue deal for Cyprus, announced on Saturday, prompted widespread outrage on the island at the prospect of ordinary savers being forced to pay a levy of 6.75%.

The Cypriot finance ministry announced a change in the plan on Tuesday, to exempt savers with less than 20,000 Euros, while those over 100,000 Euros would still be charged at 9.9%. However, this was not enough to placate critics.

The plan to tax bigger deposits at a higher rate has angered Russia, as Russian nationals hold many of those larger deposits.

And the government fears a higher levy on these larger deposits would prompt many large investors to withdraw from the island and would effectively destroy its financial sector. Russia has also said it may reconsider the terms of a 2.5bn-Euro loan it made to Cyprus in 2011, which was separate from the proposed Euro-zone bailout.

Cypriot Finance Minister Michalis Sarris arrived in Moscow on Tuesday to see if the repayment on that loan could be delayed until 2020, and whether the interest rate could be reduced.

Meanwhile, the UK Ministry of Defence said on Tuesday evening that a plane carrying 1m Euros had arrived in Cyprus as a contingency measure to provide military personnel and their families with emergency loans. The money is to be used for British personnel and their families if cash machines and debit cards stop working.