Lawmakers in Cyprus have rejected a bill that would have taxed bank deposits to help pay for an international financial bailout.

As speculation escalated about the country going bankrupt as a result, that the European Central Bank said it will provide liquidity to Cyprus as needed within existing rules.

The bill taxing bank deposits, which was amended Tuesday to shield small depositors from the tax, was rejected with 36 votes against, 19 abstentions and zero votes in favor. One deputy was absent.

Hundreds of protesters outside Parliament cheered and sang the national anthem when they heard the bill had not passed.

Cyprus will now have to come up with an alternative plan to raise money.

If it doesn't, it won't qualify for external rescue loans, the country's banks face collapse and the country could go bankrupt.

The government presented a plan over the weekend to dip directly into people's Cypriot bank accounts in order to contribute €5.8 billion ($7.5 billion) out of a €15.8 billion bailout. The move has caused uproar.

The government brought an amended bill Tuesday that would shield small savers with up to €20,000 ($25,858) in the bank from the seizure. But the proposal faced stiff resistance.

Although Cyprus is the smallest euro zone country to be bailed out, its planned rescue has sent shockwaves through the single currency area as it was the first time European authorities have targeted people's bank accounts. Other bailed out countries such as Greece, Ireland and Portugal have raised money through other taxes.

Proponents of the Cypriot levy argue that this taxes foreigners who have taken advantage of Cyprus's low-tax regime to share the cost of bailing out the country's banks, which have been hit hard by over-exposure to bad Greek debt.

About a third of all deposits in Cypriot banks are believed to be held by Russians. As lawmakers wrangled, Finance Minister Michalis Sarris was to fly to Moscow Tuesday afternoon to meet with his Russian counterpart.

Opponents point out that a blanket charge on people's bank accounts will hurt ordinary Cypriots more, and could shake confidence in the country's banking sector. And by going after deposits, European policymakers have set a precedent that could be repeated in the future. The worry of bank runs across Europe lies at the heart of the concerns in markets at the moment.

The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.

Published on our website on March 20, 2013