A Mess

From the NY Times:

NICOSIA — Cyprus’s Parliament was set to reject a divisive tax on bank deposits in a vote scheduled for Tuesday, a government spokesman said, a move that would push the island closer to a default and banking collapse. 

A weekend announcement that Cyprus would break with previous practice and impose a levy on bank accounts as part of a €10 billion, or $13 billion, E.U. bailout prompted turmoil on European financial markets on Monday. 

Cypriot and euro zone officials have sought to soften the initially proposed levy of 6.75 percent on depositors of up to €100,000 and 9.9 percent above €100,000 to ease the burden on small savers.

But passage of the bill in the 56-member chamber, where no party has a majority, was unlikely and it was not clear if the vote would even go ahead later on Tuesday if leaders were sure it would be rejected. 

“It looks like it won’t pass,” a Cypriot government spokesman, Christos Stylianides, told state radio.

The House of Representatives was expected to meet at 6 p.m. local time. Rejection of the measure would effectively block a bailout that Cyprus needs to keep its banks afloat and government paying wages and welfare. 

Tuesday’s vote, originally planned for Sunday, has been postponed twice already. Three parties have said outright they will not support the tax, while a fourth, in the co-governing coalition, said it cannot support it as it stands either.

 And what does this all mean?

BRUSSELS — A plan to rescue the tiny European country of Cyprus, assembled overnight in Brussels, has left financial regulators, German politicians, panicked Cypriot leaders and a disgruntled Kremlin with a bailout package that has outraged virtually all the parties.

In the end, a bailout deal that was supposed to calm a financial crisis in an economically insignificant Mediterranean nation spread it wider. Word of the plan unnerved markets across Europe, raised fears of bank instability in Spain and Italy and sent pensioners into the streets of the island’s capital, Nicosia, in protest. 

As markets tumbled and the Cypriot Parliament fell into turmoil, salvos of blame were hurled back and forth across the Continent. 

Officials scrambled to explain what went wrong and how best to control the damage of what Philip Whyte, a senior research fellow at the Center for European Reform, called a “completely irrational decision” to make bank depositors liable for part of the bailout.

The deal flopped so badly that finance ministers who came up with it shortly before dawn on Saturday were on the phone to each other Monday night talking about ways to revise it. Whatever the outcome, the dispute is a vivid demonstration of why Europe, which until recently was congratulating itself on having weathered the worst of the financial storm, has trouble making decisions with so many different interests represented at the table.

Hard to see how the EC doesn't eventually unravel.

Cyprus may not be the thing that does that, but it surely is a sign that this union is not sustainable.