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Tiny Cyprus is scene of epic Merkel-Putin clash

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Germany’s tough-talking chancellor, Angela Merkel, has finally met her match.

Russia President Vladimir Putin yesterday successfully helped persuade legislators in the tax-haven island nation of Cyprus to reject a draconian bank deposit tax.

The 36-0 vote by the Cypriot lawmakers was in direct defiance of the German leader — and sparked dancing in the streets by protesters.

Putin had slammed the plan, hashed out over the weekend in Brussels by European leaders, as “unfair, unprofessional and dangerous.”

Putin’s finance chief also threatened to pull a $3.2 billion loan that has been propping up the tiny island nation.

The Merkel-backed measure, tied to the bailout of Cypriot banks, called for a tax of between 6 percent and 10 percent to be imposed on all bank deposits.

Savers in the country have taken to the street in protest. The Russian president had their back.

Nearly half of the deposits in Cypriot banks are from foreigners. Most of the deposits — or roughly $17 billion — come from Russians seeking to take advantage of low taxes and lax banking laws.

Merkel had given Cypriot leaders explicit warning to approve the measure — or risk losing further financial aid. Germany is lending the most money to the bailout.

Meanwhile, others, ranging from leaders in beleaguered European countries to Wall Street investors, fear if successful in tiny Cyprus, a similar plan could be implemented in Greece, Spain or other countries.

European Union leaders promised the Cypress situation was unique.

But the levy has infuriated Putin, a longtime friend of Cyprus, and risks leading to a run on Cyprus’ banks when they re-open tomorrow — if they open.

Banks in Cyprus were ordered closed through today because of the crisis — and a bank holiday could be extended through the weekend.

The EU plan would have imposed a 6.75 percent tax on Cyprus bank deposits under $128,894, and 9.9 percent on deposits over that amount.

Merkel supports the tax, which will raise $7.5 billion, to protect her taxpayers.

Cypriot banks have a reputation for attracting money-launderers and other tax cheats, and Merkel thought it more fair for those depositors to foot the bailout bill.

Following the rejection of the Merkel-backed tax, EU leaders were huddling in Cypress with the country’s leaders in hopes of hammering out Plan B.

Merkel has threatened to pull the plug on Cypriot bank loans if the $7.5 billion tax is not approved.

Economists in the US also expressed concern about the levy on Cypriot savers, saying it carries risks for the global economy.

“The hope among European policy makers is that this will be perceived as a special case,” said John Lonski, chief economist with Moody’s Investors Services.

“It’s a slippery slope,” Lonski said, warning that it could lead to runs on banks in other financially troubled countries, like Spain and Italy.