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Britons with bank accounts in the country face having their savings targeted following a £10 billion rescue package by the Cypriot government with its eurozone partners and the International Monetary Fund that includes a compulsory one-off levy on deposits.
European officials said people with less than 100,000 euro (£87,000) in their accounts will have to pay a one-time tax of 6.75%, those with more money will lose 9.9% - a move which could affect thousands of Britons.
Kevan Jones, Labour's shadow armed forces minister, called on ministers in the UK to reveal whether they had fought to exempt British forces personnel in Cyprus from the levy.
"There are thousands of UK service personnel and their families based in Cyprus who could be impacted by this. Some may have served in Afghanistan," he said. "Ministers must tell us how many personnel and their families could have their savings docked and whether they argued for exemptions for our forces. If not, the country will be angry and will want to know why not. Service families have been hit by cuts to allowances and permanent reductions in pensions by the Government. If our forces' savings are raided while they are stationed in Cyprus as part of their military service the whole country will be outraged. Our heroes should not lose out while serving their country."
There are 59,000 British residents in Cyprus and 1.1 million Britons visit the island every year, the Foreign Office said. About 3,500 British military personnel are based there.
An anonymous British serviceman contacted Sky News to say: "Service personnel have no way of reaching their money and all electronic transfers have been barred by the Cyprus banks. Service personnel and their families are furious but can do nothing." British expat David Symonds told the same channel: "The view is that the timing is cynical. It's a long weekend here. Electronic banking links have been closed. Monday is a public holiday. Banks don't reopen until Tuesday, when they do there will be queues of people on the pavement waiting to get their money out. Tempers could get frayed. Those frayed tempers could well lead to violence."
News of the levy came as a shock following strict assurances from president Nicos Anastasiades that he would not accept a deal which required depositors to share in the losses. Lines formed at many ATMs in Cyprus as people scrambled to pull their money following news of the raid on their savings - an unprecedented step in the eurozone crisis. Cypriot bank officials said that depositors can access all their money except the amount set by the levy - which is expected to raise £5.8 billion - and officials added that withdrawing funds on Saturday would not reduce anyone's levy.
Bank of Cyprus UK assured customers in the UK that their deposits would not be affected by the levy, as it is a UK bank and is protected by UK financial regulation. Laiki Bank UK said on its website: "Your eligible deposits with Laiki Bank UK are protected up to a total of 100,000 euro by the Cyprus Deposit Protection Scheme and are not protected by the UK Financial Services Compensation Scheme. Any deposits you hold above the 100,000 euro limit are not covered."
Bank bosses are due to meet with Central Bank officials to figure out their next steps, while Mr Anastasiades has called for a meeting of party leaders to assess the situation. Cypriot and European officials feared that forcing depositors to take a hit would undermine investors' confidence in Cyprus and other weaker eurozone economies - and even possibly lead to bank runs.
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