Banks closed until Thursday as Cyprus seeks new bailout deal

Mr Clark told MPs the Government was putting pension payments on hold until “at least tomorrow” to “ensure that any payments made by Her Majesty’s Government to banks in Cyprus get to the intended recipient”.

His statement came as the Cypriot government postponed a vote on the unprecedented one-off bank deposit tax, part of a wider bailout package, until today.

Cypriot banks will remain closed until Thursday, as yesterday’s bank holiday has been extended by two days, the nation’s central bank said.

The Cypriot government wants time to amend the deal reached over the weekend, which will raid ordinary people’s savings to partly fund a bailout package.

Unlike the previous rescues for Greece, Portugal, Ireland, and Spanish banks, the proposed Cypriot bailout is the first one that dips into people’s bank accounts to finance a bailout.

In exchange for 10 billion euro (£8.6bn) in rescue money, the government proposed a one-time tax of 6.75 per cent on all bank deposits under 100,000 euro (£86,490) and 9.9 per cent over that amount.

The bailout package, which has still to be finalised, involves the International Monetary Fund, European Central Bank and European Union.

But after prompting an outcry from depositors, the Cypriot government is now looking at changing the terms of the deal so small savers lose less, while big depositors pay more.

One proposal is to make the tax more progressive, with a one-time three per cent levy on deposits below 100,000 euro, rising to 15 per cent for those above 500,000 euro (£428,505).

Mr Clark reiterated the UK Government’s commitment to compensate around 3,000 armed forces members stationed in Cyprus for “reasonable losses” incurred from the situation.

And he said several thousand UK pensioners in Cyprus would have their payments temporarily frozen, adding that it is possible to change the designated bank account to receive payments online.

“Any UK pensioners in Cyprus can be assured that their future pension payments are being held safely and a normal payment service will resume as soon as the situation in Cyprus becomes clear,” he said.

“However, recipients of these payments are able of course to switch the bank account to which payments are made with immediate effect.”

Mr Clark urged anyone wishing to do so to contact the International Pension Centre online.

The “risky” bank deposit tax would be “extremely dangerous” for wider economic confidence, Shadow Treasury Minister Chris Leslie said.

“While it is, of course, important their banks are put on a secure footing, it is extremely dangerous for wider economic confidence if the fundamental trust of retail depositors is undermined in this way.”

Any modifications to the bank deposit levy will have to be approved by the other eurozone finance ministers, who will hold a telephone conference ahead of the Cypriot parliament vote.

Several hundred people gathered yesterday outside the Cypriot parliament building, with some chanting “thieves”.

Analysts have warned that the proposal sets a dangerous precedent, undermines confidence and could spark an exodus of capital from other fragile European economies.

Michael Hewson, senior analyst at CMC Markets, said: “If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job.

Stock markets have proved reasonably resilient to the news with the FTSE 100 Index initially falling by 100 points, but closing 35 points down on 6457.9, a fall of 0.5 per cent. The euro has also fallen sharply against the US dollar and the pound even though the Cypriot economy accounts for only 0.2 per cent of the combined output of the 17 eurozone countries.