Update 3:21 pm EST: The Cypriot Parliament has formally rejected the bailout.

The Cypriot Parliament rejected an international bailout package on Tuesday that had sought to tax bank depositors to pay a big part of the bill, despite a revision that would have exempted small bank accounts from the levies.

After the government was forced to extend a bank holiday for fear of bank runs the Cypriot Parliament is preparing to reject the bailout which required a tax to be levied on bank deposits.

Cyprus’s Parliament is likely to reject an international bailout package that involves taxing ordinary depositors to pay part of the bill, President Nicos Anastasiades said Tuesday, despite a revision that would remove some objections by exempting small bank accounts from the levies..

Should the measure fail in Parliament, Mr. Anastasiades and his E.U. partners would have to return to the negotiating table. Analysts have also raised the possibility of bank runs and a halt in liquidity to Cypriot banks from the European Central Bank if the measure did not pass.

The bailout was not only incredibly unpopular within Cyprus but worried depositors in other eurozone countries that future bailouts could include the provision.

The bailout plan, negotiated over the weekend, has aroused harsh criticism in many quarters for its unprecedented inclusion of ordinary bank depositors — including those with insured accounts — among those who would have to bear part of the cost.

The original terms of the bailout called for a one-time tax of 6.75 percent on deposits of less than €100,000, and a 9.9 percent tax on holdings of more than €100,000. The moves are designed to raise €5.8 billion of the total €10 billion bailout cost — a condition imposed by Cyprus’s E.U. partners.

The bank holiday will continue regardless of the outcome in parliament. The president and E.U partners offered an amended deal today but it too was considered likely to be unpalatable to parliament.

If for some reason parliament does approve the bailout and the deposit tax goes into effect Cypriot central bank governor Panicos Demetriades claims that as much as 10% of the deposits placed in Cypriot banks would flow out of the country when the banks reopen on Thursday, effectively causing a collapse.

Photo by Ras67 under Creative Commons license