Bank Runs ?

(Reuters) - Cyprus was working on a last-minute proposal to soften the impact on smaller savers of a bank deposit levy after a parliamentary vote on the measure central to a bailout was postponed until Monday, a government source said.

In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit a portion of their deposits in return for a 10 billion euro ($13 billion) bailout for the island, which has been financially crippled by its exposure to neighboring Greece.

The decision, announced on Saturday morning, stunned Cypriots and caused a run on cash points, most of which were depleted within hours. Electronic transfers were stopped.

The originally proposed levies on deposits are 9.9 percent for those exceeding 100,000 euros and 6.7 percent on anything below that.

The Cypriot government on Sunday discussed with lenders the possibility of changing the levy to 3.0 percent for deposits below 100,000 euros, and to 12.5 percent for above that sum, a source close to the consultations told Reuters on condition of anonymity.

The source said the discussions had the "blessing" of a troika of lenders from the European Commission, the IMF and the European Central Bank.

In Brussels, a spokesman for Olli Rehn, the European commissioner in charge of economic affairs, said discussions were still under way in Cyprus.

"If the Cypriot leaders agree on a more progressive scale for the one-off levy, in view of making it fairer for smaller savers and provided this would have the same financial impact, the Commission would be ready to recommend that the Eurogroup endorse such an agreement," the spokesman said.

The move to take a percentage of deposits, which could raise almost 6 billion euros, must be ratified by parliament, where no party has a majority. If it fails to do so, President Nicos Anastasiades has warned, Cyprus's two largest banks will collapse.

One bank, the Cyprus Popular Bank, could have its emergency liquidity assistance (ELA) funding from the European Central Bank cut by March 21.

A default in Cyprus could unravel investor confidence in the euro zone, undoing the improvements fostered by the European Central Bank's promise last year to do whatever it takes to shore up the currency bloc.

A meeting of parliament scheduled for Sunday was postponed for a day to give more time for consultations and broker a deal, political sources said. The levy was scheduled to come into force on Tuesday, after a bank holiday on Monday.

BREAKS A TABOO

Making bank depositors bear some of the costs of a bailout had been taboo in Europe, but euro zone officials said it was the only way to salvage Cyprus's financial sector.

European officials said it would not set a precedent.

In Spain, one of four other states getting euro zone help and seen as a possible candidate for a sovereign rescue, officials were quick to say Cyprus was a unique case. A Bank of Spain spokesman said there had been no sign of deposit flight.

But the chief of Greece's main opposition, the anti-bailout Syriza party, Alexis Tsipras, blamed the move on German Chancellor Angela Merkel, according to Greek state news agency ANA.

"We must all together raise a shield to protect the peoples (of Europe) from Ms Merkel's criminal strategy," said Tsipras, who wants a pan-European debt conference to forgive debt.

The crisis is unprecedented in the history of the Mediterranean island, which suffered a war and ethnic split in 1974 in which a quarter of its population was internally displaced.

Anastasiades, elected only three weeks ago, said savers will be compensated by shares in banks guaranteed by future natural gas revenues.

Cyprus is expecting the results of an offshore appraisal drilling this year to confirm the island is sitting on vast amounts of natural gas worth billions.

In a televised address to the nation on Sunday, Anastasiades said he had to accept the tax in return for international aid, or else the island would have faced bankruptcy.

"The solution we concluded upon is not what we wanted, but is the least painful under the circumstances," Anastasiades said.

With a gross domestic product of barely 0.2 percent of the bloc's overall output, Cyprus applied for financial aid last June, but negotiations were stalled by the complexity of the deal and the reluctance of the island's previous president to sign.

International Monetary Fund Managing Director Christine Lagarde, who attended the meeting, said she backed the deal and would ask the IMF board in Washington to contribute to the bailout.

RUSSIANS, EUROPEANS

According to a draft copy of legislation, failing to pay up would be a criminal offence liable to three years in jail or a 50,000 euro fine.

Those affected will include rich Russians with deposits in Cyprus and Europeans who have retired to the island, as well as Cypriots themselves.

"I'm furious," said Chris Drake, a former Middle East correspondent for the BBC who lives in Cyprus. "There were plenty of opportunities to take our money out; we didn't because we were promised it was a red line which would not be crossed."

"I've lost several thousand," he told Reuters.

British finance minister George Osborne told the BBC on Sunday that Britain would compensate its 3,500 military personnel based in Cyprus.

Anastasiades' right-wing Democratic Rally party, with 20 seats in the 56-member parliament, needs the support of other factions for the vote to pass. It was unclear whether even his coalition partners, the Democratic Party, would fully support the levy.

Cyprus's Communist party AKEL, accused of stalling on a bailout during its tenure in power until the end of February, would vote against the measure. The socialist Edek party called EU demands "absurd".

"This is unacceptably unfair and we are against it," said Adonis Yiangou of the Greens Party, the smallest in parliament but a potential swing vote.

Many Cypriots, having contributed to bailouts for Ireland, Portugal and Greece - Greece's second bailout contributed to a debt restructuring that blew the 4.5 billion euro hole in Cyprus's banking sector - are aghast at their treatment by Europe.

Cyprus received a "stab in the back" from its EU partners, the daily Phileleftheros said.

But it and another newspapers highlighted the danger of plunging the banking system into further turmoil if lawmakers sat on the fence.

"Even if the final agreement is wrong, if this is not approved by parliament the damage will be even greater," Politis economics editor Demetris Georgiades said in an editorial.