Contagion fears over Cyprus bank deal

heir first reaction to the €10 billion Cypriot bailout deal today, amid fear that the deal could spark contagion across the euro zone.

Eu ro zone finance ministers agreed early on Saturday morning the terms of Cyprus 's long-delayed bailout, which includes an unprecedented move to tax depositors. Under the terms of the deal, which must be approved by the Cypriot parliament, depositors with savings of less than €100,000 will be levied 6.75 per cent, while those with funds over €100,000 will be taxed 9.9 per cent. Depositors will receive shares in the banks in lieu.

However Cyprus's president was last night in talks with Brussels and political rivals to ease the terms of a planned levy on smaller deposit holders. Officials involved in the talks say a revised deal being discussed in Nicosia, with the blessing of the Europe an Commission, would shift more of the burden on to deposits larger than €100,000. They said the changes in the levy's rates were in flux, but they could see the higher rate increase to as much as 12.5 per cent while the smaller deposits could be about 3.5 per cent.

The Cypriot government postponed a vote in Parliament on the issue until today, prompting fears that the deal could be blocked by parliament where no party has an overall majority.

While the levy is due to be introduced tomorrow ECB officials in Nicosia were understood to be pressing the Cypriot authorities to introduce the levy today, amid mounting political controversy over the issue.

EU economics and monetary affairs commissioner Olli Rehn moved to quell concerns about any knock-on effect in the euro zone. Cypriot president Nicos Anastasiades, who was elected just three weeks ago and had vowed not to permit a "bail-in" of depositors, defended the deal.

Cyprus's two main banks, Bank of Cyprus and Laiki Bank, which were sharply hit by the write-down of Greek debt during the second bailout of Greece, are relying on support from the European Central Bank. Cyprus's banks face a capital hole equivalent to 80 per cent of GDP.

In addition to the tax on deposits, the deal sanctions a rise in corporate tax from 10 to 12.5 per cent and doubling of the tax on interest on savings. A relatively small percentage of senior bond holders was behind the decision not to bail-in these liabilities.

While public consternation grew in Cyprus over the weekend, lawmakers in Brussels are now focusing their attention on investor reaction to the agreement, which was struck after markets closed on Friday, and ahead of a bank holiday in Cyprus. There is fear that the move could destablise already shaky economies such as Spain. A spokesman for the Bank of Spain said there were no signs of deposit flights.

Amid criticism in Germany, German finance minister Wolfgang Schäuble has defended the Cyprus plans as a fair outcome. The German Banking Federation welcomed the Cyprus plan, saying it would "help bring about a return to financial stability in the euro zone".