Financial markets across the globe were all focused on developments in Cyprus as parliament convenes to vote on the controversial one-off bank deposit levy.

But the question on everyone's lips is: What if Cyprus votes against the Levy?

Ahead of the vote, some reports suggested that Cyprus is unlikely to push through a new levy on bank deposits due to division in its Parliament, according to government spokesman Christos Stylianides.

"There is no precedent for what would happen if Cyprus rejected the conditions," said Bill Hubard, Chief Economist at Markets.com. "Our best guess is that Europe would give Cyprus a brief and final chance to rethink and vote again."

According to Morgan Stanley, the Cypriot Parliament may not smoothly approve the package. "The Russian and International Monetary Fund positions are not clear yet, we see potential for possible legal challenges due to different treatment of depositors."

Hubard thinks that if Cyprus rejected the offer, there would be no European support for the island, forcing it to default and potentially even to exit the Eurozone.

"That would indeed leave holders of Cypriot bank deposits significantly worse off. We still consider that pretty unlikely. The threat of financial and economic chaos on Cyprus will likely lead to a 'yes' vote in Cyprus in the end, hopefully in the first attempt today."

A hypothetical Cypriot 'no' this evening could have significant repercussions on financial markets for a while, Hubard noted. "We would be in uncharted territory. But markets know that the European Central Bank (ECB) has the means to contain contagion with its promise to do what it takes to keep all reform countries in the euro."

However, according to Morgan Stanley, the ECB seems to be better equipped to contain contagion, the peripheral countries are in a stronger position and the global funding conditions are more accommodative.

The bank said: "This is likely to make markets more resilient in the long run; however, investors should expect material market weakness in the near term. Peripheral government bonds are likely to suffer near-term volatility, while we expect core euro sovereign to outperform both peripherals and swaps."

NJ

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