Cypriot lawmakers overwhelmingly rejected a deeply unpopular tax on bank deposits on Tuesday, throwing into doubt an international bailout for the troubled euro zone member needed to avert default and a banking collapse.

The 56-seat parliament voted by 36 votes against and 19 abstentions to bury the bill, a condition of a 10 billion euro $13 billion (8.6 billion pounds) European Union bailout for the Mediterranean island. One deputy was absent.

The House plenary has rejected a draft bill on Cyprus` bailout agreement that provides for an unprecedented levy to be imposed on savings in Cyprus banks (haircut) with 36 votes against and 19 abstentions. DISY deputy Stella Kyriakidou was absent as she is currently abroad.

Ruling Democratic Rally (DISY) party abstained from voting while MPs of the other parliamentary parties – left-wing AKEL party, Democratic Party, Social Democrats EDEK movement, the European Party and Ecologists-Environmentalists movement – voted against.

The Eurogroup reached Saturday an agreement in Brussels which provided for a levy on savings that stung small account holders to the tune of 6.75% in exchange for a €10 billion sovereign bailout deal, whereas deposits over 100.000 euro would be charged with a 9.9% levy.

The agreement also included an increase in corporate tax from 10% to 12.5%.

Hundreds of protesters outside Parliament cheered in jubilation and sang the national anthem when they heard the bill had not passed, the Associated Press reports.

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 eurozone 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.

Officials said he would also be looking for “further investment” in his country, correspondents report, with some speculating this might mean Russian access to Cyprus’ large undeveloped gas deposits.

The BBC’s Mark Lowen in Nicosia says it now appears that a proxy battle of sorts is taking place over Cyprus: on the one side the EU is pushing for a lighter burden on lower savers and, on the other, Russia is angry because its wealthy nationals would be taxed hard in Cyprus.

Meanwhile, the tiny Cypriot economy’s future hangs in the balance

Excluded from the international markets, Cyprus applied last June for financial assistance from the EU bailout mechanism, after its banks sought state support following massive write downs of the Greek bond holdings amounting to €2.5 billion or 25% of the island`s GDP, as result of the Greek sovereign debt haircut.


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