THE government ordered banks to stay shut until next week as the proposal to tax deposits – at lower rates – was back on the table to avert a financial meltdown.

"We don't have days or weeks, we have only hours to save our country," ruling DISY deputy chairman Averof Neophytou told reporters as crisis talks in Nicosia dragged into the evening.

Reports suggested the government may submit a bill tomorrow proposing a haircut on deposits but at lower rates than legislation that was rejected by parliament on Tuesday.

MPs threw out a proposed tax on bank deposits in exchange for a 10-billion euro bailout from the EU, a stunning rejection of the kind of strict austerity accepted over the past three years by crisis-hit Greece, Portugal, Ireland, Spain and Italy.

The tax -- 6.7 per cent on deposits under 100,000 euros and 9.9 per cent on deposits over 100,000 euros -- was designed to fetch the government 5.8 billion euros.

The shortfall resulting from the lower rates could be covered by nationalising the provident funds of semi-state companies.

Banks are to stay shut for the rest of the week and will not reopen till Tuesday after a holiday weekend.

Troika representatives arrive at the presidential palace

FINANCE Minister Michalis Sarris has vowed to stay in Moscow to reach an agreement on ways to help Cyprus out of the quagmire, after yesterday’s meetings proved inconclusive. 

Sarris went to Moscow on Tuesday evening ahead of the Cypriot parliament’s rejection of the revised draft bill regarding a one-off bank levy on deposits. 

Russian assistance had become the great eastern hope of many Cypriots following rejection of the troika’s hard-hitting measures to ‘rescue’ Cyprus, which involved an unprecedented hit to depositors, including small insured savers.

Many of the thousands of protestors demonstrating outside parliament on Tuesday waved Russian flags and even held up Gazprom posters, believing Russia would provide a silver lining to the daily forecasts of doom and gloom for the Cypriot economy. 

However, news of a helping Russian hand were nowhere to be found yesterday following the first day of talks between Sarris and the Russian authorities. 

Sarris described his meetings yesterday with Russian Finance Minister Anton Siluanov and Russian First Deputy Prime Minister Igor Shuvalov as “constructive”, a polite term used after almost every meeting among diplomats and politicians, sometimes combined with “fruitful”.

“There were no offers, nothing concrete,” said Sarris, adding, “We’ve underscored how difficult the situation is. We’ll now continue our discussion to find the solution by which we hope we will be getting some support.”  

Sarris told journalists he would stay in Moscow till some sort of agreement on Russian assistance could be reached. Talks are expected to continue in Moscow today, though no meeting with Russian President Vladimir Putin has been scheduled.

Commerce Minister Georgios Lakkotrypis was also in Moscow yesterday, officially for a tourism exhibition, but fuelling talk that access to untapped offshore gas reserves could be on the table as part of a deal for Russian aid.

Sarris is seeking to negotiate a lower interest and five-year extension on a €2.5 billion Russian loan, as well as some kind of assistance to prop up the island’s biggest banks and help Cyprus come up with the €5.8 billion demanded by the troika as a precondition to approving a €10 billion bailout. 

Meanwhile, 14 EU Commissioners are due in the Russian capital tomorrow for an EU-Russia Summit where Cyprus will almost certainly be discussed, if even only on the sidelines. 

According to Reuters, Russian Prime Minister Dmitry Medvedev said the EU bloc had behaved “like a bull in a china shop” and compared its proposals, which would force Russian customers to contribute to the rescue of Cypriot banks, to Soviet-era confiscations.

A possible sign that Russia may be willing to see Cyprus consigned to the “dustheap of history” than put its money in a sinking Mediterranean ship was a report from Interfax news wire yesterday quoting the Russian PM. 

Medvedev warned that Russia may denounce the double taxation avoidance agreement with Cyprus should things get hairy in the Cypriot banking system. 

“We have an agreement on avoiding double taxation with Cyprus. I do not know whether we need this agreement in this case,” Medvedev said.

He further warned that the collapse of Cyprus’ banking system may have “very many consequences”. 

The Russian media’s response to news of a haircut on deposits in Cyprus was one of fury with one prominent commentator, Yulia Latynina from Novaya Gazeta, accusing the EU of “robbing” billions from Russian depositors in Cypriot banks. 

The tabloid paper Moskovskiy Komsomolets said the real objective of the Europeans was clear: “This is an undisguised act of expropriation, in other words something from the arsenal of the Bolshevik class struggle, but not civilised economic policy”. 

Finance Minister Michalis Sarris in Moscow yesterday

IN THE LAST four days, we have been hearing and reading an array of rumours about how the Russians would step in with their billions and spare Cyprus having to agree to the odious levy on deposits that is a condition for the EU bailout. So far not a single one of these rumours has proved to have any basis in reality, but the production was unaffected.

On Sunday night the state broadcaster reported that Gazprom would step in and give us €17 billion and take over the banks in exchange for several of our natural gas plots and participation in the liquefaction unit that would be set up. The CyBC’s head of news reported this rumour on a current affairs show on Sunday night without providing the source or questioning its veracity. The report was denied both by the government and by a Gazprom spokesman, but this did not stop a TV economist repeating it the following evening.

Since then we have heard that Gazprom Bank would take over Laiki that the Cyprus finance minister would go to Moscow to secure a loan of €5 billion in exchange for guaranteeing the full amount of money Russian depositors would lose from a hair-cut. Yesterday the government once again had to issue a denial about a report that Laiki Bank had been bought out by Russian investors. 

The rumours do not even stand up to rational scrutiny. What rational investor would even contemplate investing in an insolvent bank that owes billions? Why would the Putin government lend money to Cyprus to protect the deposits of Russian businessmen who have chosen to keep their money out of the country? The previous government had been unsuccessfully begging President Putin for months for a loan – supposedly to strengthen Cyprus’ bargaining position with the troika – so what could have changed now?

Yesterday, Finance Minister Michalis Sarris who was in Moscow, supposedly to ask for €5 billion loan, was having difficulty persuading his Russian counterpart to agree to the extension of the repayment period of the €2.5 billion, on which we are paying an interest rate of 4.5 per cent. According to reports discussions would continue. 

The Russian government has no moral, legal or political obligation to give us a new loan or to save our insolvent banks and it is puzzling why Cypriots have such unreasonable expectations and spin tales about Russia acting as our saviour. The Russian Federation is not a charity organisation but a state which looks after its national interests and in case we have not realised these are not identical to the interests of Cyprus.

Incredibly, this fantasy about Russia giving us billions has become so ingrained in people’s minds that at Tuesday evening’s demonstration outside the legislature people were waving flags of the Russian Federation. It will not be long before these false hopes will be shattered.

THE government yesterday ordered banks to stay shut until next week as it toyed with the idea of re-submitting a proposal on tax deposits – at a much lower rate than the previous scheme – as it scrambled to avert a financial meltdown.

The government was yesterday trying to find alternative solutions after parliament on Tuesday rejected the terms of a bailout from the European Union and turned instead to Russia for a lifeline.

"We don't have days or weeks, we have only hours to save our country," Averof  Neophytou, ruling DISY deputy chairman, told reporters as crisis talks in Nicosia dragged into the evening. 

Neophytou tried to get the message through to other parties.

“I believe we will not be the cursed generation of politicians who will let our country go bankrupt,” Neophytou added.

It was suggested yesterday that the government may submit a bill today proposing a haircut on deposits but at lower rates than legislation that was rejected by parliament on Tuesday.

MPs threw out a proposed tax on bank deposits in exchange for a €10-billion bailout from the EU, a stunning rejection of the kind of strict austerity accepted over the past three years by crisis-hit Greece, Portugal, Ireland, Spain and Italy.

The tax -- 6.7 per cent on deposits under €100,000 and 9.9 per cent on deposits over €100,000 -- was designed to fetch the government €5.8 billion.

The shortfall from the lower rates could be covered by nationalising the provident funds of semi-state companies.

Bank of Cyprus vice president Evdokimos Xenophontos said the situation could be reversed but warned against touching foreign deposits.

“We cannot do it to foreign depositors who trusted us. This could be theft,” he told reporters after meeting President Nicos Anastasiades last night.

Xenophontos said only Cypriots must foot the bill in exchange for bank warrants, better interest rates, etc.

“If we protect them (foreigners) even if they leave, they will come back. We lived through an invasion and we overcame the difficulties on our own,” he said. 

Meanwhile, facing the prospect of a run on banks, the government said lenders would remain shut on Thursday and Friday, making next Tuesday, March 26, the next normal working day. Greece said Greek branches of Cypriot banks would also stay shut there.

The extended bank holiday has taken its toll on businesses, with people reduced to limited withdrawals from cash machines. 

The European Central Bank's chief negotiator on Cyprus, Joerg Asmussen, said the ECB would have to pull the plug on Cypriot banks unless the country took a bailout quickly.

"We can provide emergency liquidity only to solvent banks and ... the solvency of Cypriot banks cannot be assumed if an aid programme is not agreed on soon, which would allow for a quick recapitalisation of the banking sector," Asmussen told German weekly Die Zeit in an interview late on Tuesday.

German Chancellor Angela Merkel, whose country is Europe's main paymaster, said it was up to the Cypriot government to come up with an alternative proposal but it was fair to expect those with savings over €100,000 - the normal limit for state deposit insurance - to contribute to a bailout.

The EU has a track record of pressing smaller countries to vote again until they achieve the desired outcome.

Nicosia was eerily quiet on Wednesday, and there was evidence the bank closure was slowing trade.

"Things won't be so bad as long as people can withdraw from ATMs but if they go too there will be a huge problem," said Titos Pitsillides, 50. Several petrol stations were refusing credit cards, insisting on payment in cash.

Government spokesman Christos Stylianides said a "Plan B" was in the works.

DISY lawmaker Marios Mavrides told Reuters one option under discussion was to nationalise pension funds of semi-government corporations, which hold between €2 billion and €3 billion.

An opposition politician present at yesterday’s crisis talks said: "The idea is we can get the pension funds of organisations like the Cyprus Telecoms Organisation and the Electricity Authority, maybe some others as well, and raise two to three billion euros.

"If we raise half of the money then maybe we could top up to the €5.8 billion amount by passing the Cypriot banks into Russian hands."

But there was nothing concrete out of Moscow last night.

President of the European Council Herman Van Rompuy yesterday stressed the need to find a solution for the economic crisis in Cyprus. 

Van Rompuy, who was speaking before the European Parliament, said that the situation in Cyprus must be resolved urgently. 

"The current, highly uncertain situation is highly damaging, especially for the people of Cyprus, and has to be addressed as soon as possible," he stressed. 

Van Rompuy said the EU was ready to show its solidarity with a €10 billion deal and added that the EU was open to alternative solutions.

What is now important, Van Rompuy said, is to save Cyprus and the prosperity of the Cypriot people.

President Nicos Anastasiades said late last night a decision would have to be made today at the latest.  Everyone would have to rise to the occasion, he warned.

(Reporting by George Psyllides and Reuters)

Members of the troika of international lenders arrive at the Presidential Palace yesterday (Christos Theodorides)

The European Central Bank gave Cyprus until Monday to raise billions of euros to clinch an international bailout or face losing emergency funds for its banks and inevitable collapse.

The ultimatum came with the island's leaders locked in talks on a "Plan B" to try to raise 5.8 billion euros demanded by the EU under a 10 billion euro ($13 billion) rescue, after angry lawmakers threw out a tax on deposits as "bank robbery".

Officials said new options discussed on Thursday could include nationalising pension funds of semi-state companies, issuing an emergency bond linked to future natural gas revenue or a revised bank deposit levy hitting only large investors, many of them Russians.

The European Central Bank, which has kept Cyprus's banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off.

"Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks," it said.

Cyprus's central bank governor said he expected to clinch a financial support package by then. He did not say how.

The government has ordered banks to stay closed until Tuesday. The stock exchange also suspended trading for the rest of the week.

Cyprus Central Bank Governor Panicos Demetriades makes statements outside the presidential palace in Nicosia March 21, 2013

THE GOVERNMENT has achieved consensus on the setting up of an Investment Solidarity Fund in a bid to raise the required €5.8 billion that would unlock the EU/IMF’s €10 billion financial assistance package for Cyprus.

The creation of the Fund comes in the wake of parliament’s rejection of a controversial tax levy on banking deposits agreed by the Cypriot government and Eurogroup last Saturday.

“Following a proposal by the President of the Republic there was a consensus reached and a unanimous decision was taken for the establishment of an Investment Solidarity Fund. The proposal is currently undergoing legal and technical processing by the Law Office of the Republic,” said government spokesman Christos Stylianides in a written statement.

President Nicos Anastasiades met with party leaders this morning to discuss a ‘plan B’ that would save the economy from collapse.

Stylianides said the president fully respected parliament’s rejection of the bank levy, and was continuing with the collective effort to find solutions, consulting with heads of state and government, as well as with economic and political actors at home and abroad.

The spokesman said it was “within this framework and in a spirit of consensus and mutual understanding” that today’s meeting between the president and party leaders was held and which led to the unanimous decision on the formation of an Investment Solidarity Fund.  

“For this purpose draft, legislation is being prepared by the Law Office of the Republic, which will be presented before the Council of Ministers in a meeting today at 6pm,” he added.

Stylianides called on everyone to show calm and act responsibly so as not to “disturb the spirit of consensus that exists among the political leaders”.

“The president and the government assure the people of Cyprus that the leadership will rise to the occasion and all of us together will lead the country out of the impasse,” he said.

The levy on insured and uninsured depositors was overwhelmingly rejected by the Cypriot parliament last Tuesday. Excluded from the international markets, Cyprus applied last June for financial assistance from the EU bailout mechanism, after its banks took losses of €4.5 billion (amounting to 25 per cent of the island’s GDP) following the Greek sovereign debt haircut.

The island’s banks have been closed since last Saturday as the government and parties try to find a way out of the crisis. The European Central Bank has given Cyprus until Monday to raise billions of euros to clinch an international bailout or face losing emergency funds for its banks and inevitable collapse.

President Nicos Anastasiades meeting with party leaders at the Presidential Palace

CONFUSION reigns supreme in the Cyprus bailout. So it is fairly risky to stick out your neck commenting on an unknown outcome that could leave you exposed to ridicule in hours if things change. And this blog is not intended to be a daily or even weekly commentary as I am not providing short-term trading advice, meaning that it is tempting to just wait and see what the outcome will be.

However, as this is so far the most important macroeconomic event of 2013 and it is continuously developing in new and perplexing ways, I feel it is necessary to try to make some sense out of what we are observing and hearing.

What we know now is that the Cypriot parliament has rejected the bailout package after a poker game with the troika, trying to deal many different hands varying from zero percent deposit tax for the smaller depositors to 15 percent on the larger ones. None of the combinations have proved sufficiently appetising to secure a deal so far.

We also know that France has categorically ruled out that a plan B will be made available. This sounds plausible as we are already at least at plan D or plan E. We also know that the Russians are now heavily involved behind the scenes, despite being understandably ticked off about the whole process. We know that this is now turning into a geopolitical chess game, where important European oil and gas reserves may actually find their way into Russian control, in spite of all the ambitions of the past decades to achieve the exact opposite with regard to the European energy supply. We know that Merkel cares more about positioning for the upcoming domestic election than the future fate of Cyprus.

Furthermore, we know that Cyprus banks are closed until at least next Tuesday, but also that they will not open until some kind of deal is in place - or the issue of a deposit levy will be irrelevant, as there will not be a penny left in Cyprus, certainly not of foreign money. 

We know that a consortium of banks has offered a private solution to the crisis, but apparently not been seriously considered.

On a lighter note, we now also know that the first name of the Cyprus central bank governor is Panicos, indicating that the old saying, "Your name is your destiny" may indeed hold some truth... sorry, excuse the pun, but I could not help myself. Actually, I feel for the man who may well hold one of the least desirable jobs in the world right now.

That is a lot to take in. Where will it all end? What have we learned from this?

A number of things. We have seen again that the eurozone is unable to deal rationally with its problems. This has got to be the most incompetent handling of a Euro crisis event so far, but underlines the hopeless situation the 17 countries that share the common currency are in. 

The panic is so great that no step is too extreme to preserve the doomed project and to defend the political capital invested in this monumental failure. That we have already come to a stage where politicians blatantly attempt to confiscate innocent and weak citizens' savings is a new low that was somewhat unexpected already at this point. It bodes ill for what can happen when the crisis deepens in the future - which it will.

The idea of a one-off wealth tax, however, is not new. Several research reports have pointed in recent years to the fact that the desperate need for funding in the public sector could - and probably will - eventually lead to confiscation of wealth in a monumental scale. Boston Consulting Group suggested in a recent report that about 29 percent of ALL private wealth, not just deposits, will eventually be likely to be confiscated to cover the debts already incurred. So we had better get used to seeing our money being appropriated by money-hungry politicians. This is just the beginning. The cat is out of the bag, no matter if this particular deal should fall apart.

What astonishes me is that such an important and extreme move is risked for such a modest prize. The slow realisation that confiscating our money will be the next move in the debt crisis has been made very acute by this blatant move. The most important game changer in years and the most frightening tool in the tool box has been pulled out in the open for a mere USD 5.8 billion. The impact could trigger massive asset capital flows and asset devaluations to the tune of hundreds of billions. The loss of trust will be detrimental to all weak economies. Why on earth did the troika not save this shocker for a substantial occasion, say a bailout of Spain or Italy? Incompetence? Lack of market understanding? Or even more frighteningly - perhaps because of a wish to introduce this new tax tool to get the voter populations used to new ideas for milking the rich in the future? 

This is intriguing and fascinating - it is just a great shame that the population of Cyprus needs to go through such heartache for problems they did largely not create themselves, and have no way to avoid. 

Who will be next to find themselves in such a situation is the prudent question to ask?

Be safe out there.

Lars Seier Christensen is co-founder & CEO, Saxo Bank A/S

VIDEO: TV interview given by the CEO of Saxo Bank to CNN. 

TURKEY could challenge any move by Cyprus to speed up offshore natural gas exploration as a way of attracting desperately needed investment to save its teetering economy, senior Turkish officials said on Thursday.

The EU has given the island until Monday to raise the billions of euros it needs to clinch an international bailout or face the collapse of its financial system and likely exit from the euro currency zone.

Cyprus is in talks with Moscow over possible Russian investments. Cypriot Finance Minister Michael Sarris has identified the divided island's offshore gas riches as one area in which Russia could invest.

"This resource belongs to two communities and the future of this resource can't be subject to the will of southern Cyprus alone. (We) may act against such initiatives if necessary," one of the Turkish officials told Reuters.

"The exclusive use of this resource ... by Southern  Cyprus is out of question ... and unacceptable."

Cypriot efforts to monetise as yet undeveloped offshore gas fields and position them as a vital source of energy for Europe have raised tensions with Turkey, which demands a joint approach and a share of the revenue.

"We are discussing all legal means ... We could take the case to the European Union but we will use all political and legal channels," the official said without elaborating.

Moscow would tighten its grip on European supplies if it invested in natural gas fields in the Mediterranean south of Cyprus as part of a deal to solve the island's financial crisis.

So far, some 200 billion cubic metres of natural gas worth $80 billion at current prices have been discovered in the Aphrodite gas field in Cypriot waters, although the figures still have to be audited.

That would be enough to cover around 40 percent of the European Union's annual gas consumption.

Cyprus hopes to start exporting in 2018, but energy analysts say extracting the gas will prove costly and slow, and Cypriot supplies may run into a global glut, with shale gas plentiful by then in North  America, Russia and even Europe. (R)

RUSSIA'S VTB said it did not want to buy banking assets in Cyprus, as talks continue on whether Russia can help the island, whose financial system may collapse if it does not get an international bailout.

Cypriot Finance Minister Michael Sarris was in Moscow for a second day to seek investments in Cyprus' banks and energy resources to reduce its debt burden, as well as an extension to an existing Russian bailout loan.

The European Union has given Cyprus till Monday to raise billions of euros for an international bailout or face the collapse of its financial system and likely euro exit.

Asked if VTB, Russia's No. 2 bank, was interested in buying banking assets in Cyprus, where it operates via subsidiary Russian Commercial Bank, chief executive Andrei Kostin said: "No".

"Two big banks there are in a very hard situation. They need significant investments in the form of a bailout. So it's meaningless to speak in any way about us being interested."

Kostin told reporters VTB may revise its strategy regarding Cyprus operations or even shut down its operations on the island if a levy, or similar charge, was imposed.

Cypriot banks have been shut since last weekend, after the European Union proposed a tax on banking deposits as a requirement for a 10 billion euros ($12.95 billion) bailout.

Officials have said Russian investors are interested in buying control of Cyprus Popular Bank and increasing their holdings in Bank of Cyprus - the two biggest banks on the Mediterranean island.

The Cypriot government denied on Wednesday that it had struck a deal to sell Cyprus Popular Bank to Russian investors.

Ratings agency Fitch said the deposit levy or "some form of burden-sharing involving creditors of troubled banks would be unlikely to result in material losses for Russian banks."

The statement echoed comments from the Russian central bank, which does not expect the Russian banking system to be threatened by the proposed deposit levy.

Russian banks had $30 to $40 billion tied up in cross-border loans to Cypriot firms at the end of 2012 and some $12 billion on deposit with Cypriot banks, Moody's said earlier.

VTB had $13.8 billion in assets and $374 million in equity through its Cypriot subsidiary, Russian Commercial Bank, at the end of 2011, according to Moody's.

VTB has said losses from its Cyprus operations may in a worst-case scenario reach "tens of millions of euros".

Fitch said on Thursday that banks' customers would suffer most if a levy was imposed, while banks could take some hit if they advised their clients to place money with the island.

"However, Fitch would expect any such losses to be small relative to the equity of the banks affected," it said.

It is unclear when Cypriot banks will reopen. Fitch said Russian banks could face significant operational risks only if the crisis was prolonged and brokers and became reluctant to trade with Cyprus-based counterparts.

"However, we would not expect the costs of any required restructuring of trading/brokerage businesses to have a substantial impact on the overall performance of any banks affected," the agency said.

Russian banks' capital adequacy ratio, a liquidity cushion essential to absorb possible shocks, was 13.6 per cent on Feb. 1, above the 10 per cent the central bank requires.

Fitch also views a takeover of the troubled Cypriot banks by Russian state-owned banks as "unlikely", it said. 

CYPRUS will take measures to consolidate its banking sector, including steps to avoid bankruptcy at its second largest lender, Popular Bank , Central Bank Governor Panicos Demetriades said on Thursday.

"By establishing this legal framework, resolution measures will be imposed on Popular Bank so that it will be in a position to continue to offer banking services to its clients next Tuesday," when banks are due to reopen, he told reporters. “Otherwise, the Popular Bank will be led to immediate bankruptcy and termination of its operation with catastrophic consequences for the workers and depositors, our banking system and the country’s economy.

Demetriades did not elaborate, but said the steps would protect deposits of up to €100,000.

At the same time the Popular Bank imposed a €260 per day limit on ATM withdrawals on Thursday to cope with high demand, the island's second largest lender said in a statement.

Customers queued to withdraw funds on Thursday on widespread rumours that the bank was to be closed down, later denied by the central bank.

News of the lender’s imminent restructure prompted employees to converge outside parliament to protest.

BRUSSELS, March 21 (Reuters) - Eurozone finance ministers urged Cyprus on Thursday to say how it could reach a deal with international lenders that would save it from bankruptcy after the Cypriot parliament rejected the conditions of a bailout offer.

Since the terms were rejected, the ministers expected Cyprus to propose how it wanted to change the bailout, but the main parameters needed to stay the same, Jeroen Dijsselbloem, who chairs the ministers' meetings, said in a statement.

"The Eurogroup would subsequently, on the basis of a Troika analysis that needs to be undertaken, be prepared to continue negotiations on an adjustment programme, while respecting the parameters defined earlier by the Eurogroup," he said after a teleconference with ministers.

The Troika are the representatives of the International Monetary Fund, the European Central Bank and the European Commission.

Cypriot lawmakers this week rejected an unprecedented tax on bank deposits proposed as part of a 10-billion euro bailout from the EU and IMF.

Euro zone ministers said on Monday the one-off levy on deposits should only be applied to savings higher than 100,000 euros and they repeated that on Thursday.

"The Eurogroup reaffirms the importance of fully guaranteeing deposits below 100,000 in the EU," the statement said.

The Cypriot government said party leaders had agreed to create a "solidarity fund" that would bundle state assets as the basis for an emergency bond issue, but the speaker of parliament, Yiannakis Omirou, insisted a revised levy on uninsured bank deposits was not on the table. Parliament will resume on Friday morning.

The governor of the central bank said it would impose a plan to avoid bankruptcy at the second biggest lender, Cyprus Popular Bank, but it remained unclear how measures would work.

The government submitted a bill seeking the power to impose capital controls on banks, a type of measure unseen since before the country joined the EU single currency bloc five years ago.

European Commission spokesman Simon O'Connor said there appeared to be "an improved spirit of cooperation" by the Cypriot authorities.

"In particular we welcome the Cypriot authorities' assurances that they will present in detail ... their alternative proposal for covering the part of Cyprus' financing needs outside of the agreed financing envelope. Our staff will assess this proposal carefully as of tomorrow morning," he said.

"We are conditionally satisfied that the bills on bank resolution and restriction of capital movements are moving through the legislative process ... These laws ... are absolutely essential at the current juncture," O'Connor added. 

FORGET THE plastic. In Cyprus, cash is king.
"I plan to have at least 1,000 euros on me at all times," Constantinos Tsissios, a 34-year-old banker, said at a downtown ATM in the capital, Nicosia.
"We've taken as much out as we could," he said yesterday. "You don't know what might happen over the next few days."
Five days after Cyprus's panicked leaders ordered banks to close their doors, the fate of the financial system hangs in the balance and credit cards are going out of fashion.
Reluctant to accept the promise of payment from customers, shop owners say wholesalers are demanding cash on delivery. Some petrol stations, too, are refusing credit cards. Retailers with only Cypriot bank accounts are struggling to ship supplies in from abroad. Gentlemanly arrangements are bridging the gap.
"Because of what's going on the suppliers ask for a small amount, say 50 per cent, in cash, so they can meet their costs," said Federico Basonidis, a 25-year-old worker at a kiosk selling cigarettes, newspapers and sweets.
Spooked by an aborted bid to tax their savings, Cypriots are fast losing confidence that their money will still be there when - or if - banks reopen, on Tuesday at the earliest.
Rumours on Thursday that one teetering bank would be allowed to fall saw queues grow at ATMs at a downtown branch, as staff behind locked doors replenished cash machines.
Marinos Panaretou, a 36-year-old retail manager, said he had withdrawn a maximum 500 euros every day since Saturday: "People feel safer if we have cash on us because you don't know what you're going to wake up to," he said.
Saturday was the day news broke of a proposed levy on savings to raise the 5.8 billion euros Cyprus's lenders at the EU and International Monetary Fund want in exchange for a 10- billion euro lifeline to keep the island financially afloat.
Sixty-three-year-old Christos Phasarias estimated he had lost thousands of euros worth of orders at his car-parts and accessories store: "We need to bring some orders in from abroad and they're all standing by waiting for the transfer to be made so that the goods can leave," he said.
"There's no bank to make the transfers, so we can't receive parts on time. It's going to be a disaster."
Adamos Hadjiadamou of the Association of Cypriot Supermarkets said that the majority of suppliers had suspended the customary practice of providing goods to stores in return for payments received through credit and cheques.
"We see this as unjustified," he told Reuters. "What do we want to do? Destroy the market completely?" At one petrol forecourt, pump attendant Tassos Spingas turned away two motorists who did not have cash: "How will I know if there's money in the account, when the banks are closed?" he asked.
Others kept the faith: "We don't have any problems," Stavros Stavrou, chairman of national flag carrier Cyprus Airways, told Reuters. "We've come to an understanding that we'll make payments that should have been made as soon as the banks open."

Cash is King

STANDARD & Poor's cut the sovereign long-term foreign currency credit rating on Cyprus deeper into junk status on Thursday, lowering the rating to CCC from CCC-plus as the country struggles with a banking crisis.
"We believe that in the absence of a credible alternative source of capital and fiscal financing, the risk of a disorderly credit event is rising," S&P said in its statement. It added: “The downgrade mainly reflects our view of the acute problems in Cyprus’  banking sector”, noting that since early 2012, Cyprus’ domestic banks have repeatedly suffered losses because of write-downs on their holdings of Greek government bonds and credit losses on their Greek and domestic private-sector loans.
Jeroen Dijsselbloem, the head of the Eurogroup, which comprises the finance ministers of countries whose currency is the euro, yesterday urged Cyprus to present a new proposal on the bailout.
The Cypriot government proposed to parliament on Thursday the creation of a "solidarity fund" based on revenues from hydrocarbon exploitation, bonds and other assets to help it raise the billions of euros needed to clinch an EU bailout.
"We expect that over the next few days Cyprus and the Eurogroup or other partners could reach an alternative agreement," S&P said before warning that there is the risk of renewed capital flight that would create the need for implementing capital controls.
Cyprus is currently rated Caa3 with a negative outlook by Moody's Investors Service and B by Fitch Ratings, also with a negative outlook. S&P also has a negative outlook on its new rating.
The European Central Bank has provided a liquidity lifeline, allowing Cyprus' banks to operate. However, that lifeline known as Emergency Liquidity Assistance (ELA), will be cut on Monday if no new deal is in place.
If the ELA is cut and the Cypriot banks are unable to operate, large deposits could be wiped out. One senior EU official told Reuters this would probably force the country to abandon the euro.

FINANCE Minister Michalis Sarris declined to comment late  last night on whether he managed to secure a deal with Moscow after two-days of marathon talks.
"No comment," Sarris said when asked in his hotel lobby if a deal with Russia was secured. Sarris was meeting Russian Finance Minister Anton Siluanov , after failling to agree on a deal on Wednesday.
Quoting government sources, the Cyprus News Agency said Russian officials made it clear to  Sarris that the only thing under discussion was extending an existing loan of €2.5 billion.
Cyprus and Russia had been in urgent talks over a possible financial rescue. They were discussing possible cooperation in the banking and energy sectors.
Earlier yesterday Sarris had said there were a lot of teams working on a number of issues including banks and natural gas. “We've asked for help clearly, but something that would make also economic sense for Russia,” he added.
Sarris was also seeking to extend and lower the cost of the existing €2.5 billion euro loan from Moscow.
From Moscow, Sarris said talks revolved around various possible investments, perhaps even in the ‘Investment Solidarity Fund’ which the government has decided to set up.
Working groups of Cypriot and Russian technocrats were busy trying to hammer out some arrangement. It’s understood that private Russian businessmen have been involved in the talks. Unconfirmed reports said that energy giant Gazprom was involved.
Sarris said a clearer picture would emerge once the working groups handed a report to the respective ministers. “We are cautiously optimistic…we hope that they will express an interest on certain points,” he said yesterday morning.
The minister ruled out a new Russian loan to Nicosia. That was not possible because it would increase the country’s debt to GDP ratio; Cyprus’ EU partners have made it clear that the €5.8 billion the country must raise on its own to qualify for a €10 billion bailout cannot add to the national debt.
A proposed bank tax, or haircut on deposits, would hit Russian investors here.
The flight of Russian capital – an estimated €20 billion – from the island would destroy Cyprus’ status as a financial centre.
But exactly how Moscow could help was unclear. Even if Sarris’ mission to Moscow brought results, it was always far from certain whether Cyprus’ eurozone partners – whose national parliaments must approve a bailout – would play ball.
Sources told the Mail that Sarris was seeking to extract from the Russians at least a letter of intent that he could bring back with him to Nicosia.
Commerce Minister Georgios Lakkotrypis was also in Moscow, officially for a tourism exhibition, but fuelling talk that access to untapped offshore gas reserves could be on the table as part of a deal for Russian aid.

RUMOURS were obviously circulating about the Popular Bank from early yesterday as long queues had formed at almost every one of the bank’s ATMs islandwide.
The Cyprus Mail decided to find out what sparked this hasty scramble by customers to withdraw their money and visited two of the bank’s ATMs.
“There are rumours flying about that petrol stations have started demanding cash payments for fuel so I thought it would be best to draw some money out,” 49-year-old housewife Lisa Thoukidides said. “On top of that there are more and more rumours circulating that the bank will default so it’s probably safer to get as much cash out as possible,” she said.
For 27-year-old Pakistani student Sikander Azam it was the first time he was withdrawing money since news broke over the weekend about a possible haircut to deposits. “Today was the first I heard about Popular Bank possibly closing so I came to withdraw as much money as possible,” he said.
A 60-year-old pensioner, Anna, expressed the hope that bankers and politicians showed their love for their country, as much as she loves it, in order to save the island. “I’ve been through tougher times and survived, like the invasion in 1974, so I’m sure I’ll survive this,” she said. “I’m not withdrawing money out of panic but because I need money to buy things with, and right now it looks like most places are only accepting cash,” she added, noting that she feels a lot safer holding on to the cash herself rather than the bank.
For some it was a case of following the example set by others, as 23-year-old Athina explained her decision to queue up was fuelled by fear. “After hearing the rumours about the possible closure of the bank I feared I would lose whatever little I had left in the bank and so I came to take it out,” she said. It was the second time she had made a bank-run, as she revealed after rumours began on Wednesday night about the banks plight she had visited an ATM to withdraw money.
Kyriacos Panagos, a 26-year-old lawyer said he was ready to cut his losses and move to London. “I have been withdrawing as much money as possible since rumours began at the weekend,” he said, adding “as far as I’m aware one of our banks will be forced to close so I felt the best option would be to withdraw as much as I can.” Concluding “I’m ready to move to London, it looks like Cyprus is dead.”

HUNDREDS OF Laiki (Popular) Bank employees gathered outside parliament last night after word got out that the government had prepared a bill for the second largest bank on the island to undergo restructuring.
As the sun set, news trickled out in the media of a plan to split the bank into a ‘good’ bank retaining healthy loans and a ‘bad’ bank which would take on ‘bad’ loans and work towards recovering as much money as possible. 
Around 500 Laiki employees and their families gathered in an impromptu demonstration outside parliament, where the newly-prepared bills were expected to be taken for discussion in the plenum.
Some protesters managed to break through the police barricades and make their way to the parliament doors which were locked by police.
Greek journalists covering the demonstration mocked the Cypriot media’s depiction of tussles outside parliament, suggesting they were more like polite handshakes compared to what they’ve seen in Athens.
Protesters were furious about the lack of information about whether they would have a job tomorrow, and berated the absence of employees at the demo from other Cypriot banks.
Demonstrators held banners saying, “Who’s next?” and “We will not become Germany’s slaves” while shouting slogans like, “Today it’s us, tomorrow it will be your turn”. 
Head of the banking union ETYK, Loizos Hadjicostis, called on all bank employees to go to parliament today ahead of an expected vote on the bill for the resolution and recovery of Laiki Bank.
He described yesterday’s developments as “unacceptable”.
One Laiki employee, Demetra Veresies, 47, asked: “Who is responsible for this? The bankers? The golden boys? The MPs who vote bills without knowing what they are? The German government that wants to punish Cyprus for reasons unknown? Who?”
Elena Constantinou, a Russian lawyer who’s been living 23 years in Cyprus, said she and her Russian friends from Limassol came to Nicosia to protest, without being employees of Laiki.
“What Europe is doing is not at all an act of friendship. With friends like that, who needs enemies? Once we sign the memorandum, our children and grandchildren will live as slaves,” she said.
“This is a third world war through the economy. The Italians will be next, and they know it,” added Constantinou.
She called on President Nicos Anastasiades to go himself to Moscow to speak with his Russian counterpart Vladimir Putin to seek a way out of the crisis instead of sending his finance minister.
Asked about money laundering in Cyprus, she said, “There is no money laundering here. Money laundering takes place in England, Germany and Switzerland.”

A protester clashes with police last evening

THE RESTRUCTURING of the island’s second largest bank into a ‘good’ and ‘bad’ bank will mean the end of the Cyprus economy, warned Laiki Bank’s acting CEO Takis Phidias last night.
He argued that a small haircut on deposits and an EU bailout would have kept the banks and businesses alive. The option now on the table will lead to loss of deposits and closure of businesses and higher unemployment, said Phidias.
The Laiki management team were last night informed in parliament that the government planned to table a bill proposed by the central bank governor to divide Laiki into a ‘good’ bank with only deposits of €100,000 or under, and a ‘bad’ bank where around €6 billion of uninsured deposits will be placed. 
Speaking to the Cyprus Mail after his briefing in parliament and on his way to a board meeting, Phidias said the current decision on Laiki “will be a disaster not just for the bank, but for the economy of Cyprus”.
He added: “We’re talking about €6 billion belonging to Cyprus depositors being transferred to the bad bank with little possibility of them recovering their money. We’re talking about a lot of businesses having their assets and accounts frozen. 
“Who gives anybody the right to say that someone with €100 million will get €100,000 back and someone with €80,000 will get it all? I’m not sure parliament has the right to decide this.” 
Phidias warned the impact on the rest of the banking system would be severe: “The bank is a systemic bank and we believe this problem will be transferred to the other banks very quickly. So effectively no bank will be able to operate normally from now on and I don’t really know until when.”
Phidias argued the decision to break up Laiki was a political one that “has nothing to do with the financials”.
He argued that Laiki’s restructuring plan devised by Alvarez and Marsal and submitted to the European Commission indicated that the bank had become profitable, if one took out of the equation its Greek operations, which are now in the process of being handed over to Greek banks. 
“The last decision that the Eurogroup took could have been implemented and could have provided the banks with ample liquidity to continue to operate normally,” he said, adding: “I’m sure Laiki would have been viable if we had support from the emergency liquidity assistance”.
The bank chief said businesses would have been able to operate if a haircut on deposits had been implemented. A small bank levy would not have stopped businesses from operating but the current decision before parliament “will be disastrous for the economy of Cyprus”.
Asked if a bank levy would have led to a loss of respect for the Cypriot banking system, he replied, somewhat candidly:
“There is no respect for the banking system of Cyprus at all. I don’t think it would really undermine anything, it’s a matter of surviving, and enabling the businesses in Cyprus to survive.”
Asked what will happen to Laiki if the current bill is passed, he said: “It will not open, and it will await for deposits and assets to be transferred to another bank. Those that will be transferred can operate in another bank, whichever bank that is, and the remainder will be frozen until a liquidator or I don’t know who will try to recover the bad loans.
“I don’t think any loan will be good for too long. There will be no money to make good loan payments. If the bills are passed, the economy of Cyprus will never be the same ever again,” said the bank chief.
Regarding the bill on capital constraints, he said: “How long can you actually keep limits on how much of your deposits you can withdraw on a daily basis? How long can you tell people you can only take €200 out a day? First, this is not a democracy, and second, this is a raid on your deposits. You have money in the bank and you cannot take it from any bank, if this is a democracy, and this is Europe, then congratulations to the European Union.”
Another Laiki employee who did not wish to be named said, before uninsured depositors risked a 10 per cent hit. Now, at best, they will get a 50 per cent haircut, at worst 90 per cent.
“Even those insured depositors who get their money back. Will anyone keep their money in Cyprus after this? The whole banking system will be destroyed. The cooperative bank has €5 billion in government bonds. We all know what will happen there. Nothing is secure, they just killed everyone, they killed the market,” he said.
“And what about the big companies that have deposits in Laiki. Tomorrow they will lay off thousands of employees because they’ll only have access to €100,000”.
The bank employee argued that the troika was demanding a bail-in for Cyprus because this was a quick way to shred the island’s banking sector and a litmus test for future bailouts.
“They are testing the model for the next country that will need a bailout. Italy will be next, everyone knows that, and then France. Italy has two trillion euro worth of loans. Do you think Germany has money to save it with a bailout? So, they are testing the bail-in. Merkel’s adviser estimates that a 25 per cent bail-in on deposits will save Italy,” he said, adding, “I believe the whole euro system will collapse soon”.

 

THE HOUSE will convene extraordinarily today to fast-track nine items of legislation designed to keep the local banking sector afloat and to prevent a mass outflow of deposits, after MPs asked for more time to study the bills.
Last night’s plenary session was adjourned for today at 10am, meaning that by that time the House Finance Committee will have to speed-read through hundreds of pages of documents. It’s still not clear whether the bills – some or all – will be put to the vote today.
Cyprus has three more days to enact measures aimed at consolidating its banking sector and raising some €5.8 billion on its own, a condition for getting a €10 billion bailout from the EU.
The noose tightened a little more yesterday, after the European Central Bank said that come Monday it would cut off emergency liquidity assistance (ELA) to Cyprus’ banks.
“Thereafter, Emergency Liquidity Assistance could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks,” the ECB said in a statement.
The most crucial bills drafted tabled yesterday concerned the creation of a National Solidarity Fund, a bill on the Resolution of Credit Institutions, and a capital control bill designed to prevent an outflow of deposits from Cyprus when banks reopen.
The establishment of a solidarity fund comes in the wake of parliament’s rejection of a controversial tax levy on banking deposits agreed by the government and the Eurogroup last Saturday.
The fund would bundle state assets, including real estate, as well as future gas and oil revenues, as the basis for an emergency bond issue.
It was agreed during a meeting between President Nicos Anastasiades and party leaders yesterday morning to discuss a ‘plan B’ that would save the economy from collapse.
It’s understood the fund would take the form of a private company, so that its debt-issue is not counted toward the public debt.
Reports said that pensions of semi-state enterprises would be nationalised, raising anywhere from €1 to €2 billion.
The purpose of the fund is to “finance and/or bolster financial credit institutions, to promote and/or contribute to the capitalisation of credit institutions and/or promote and/or contribute to the financing of the Republic.”
However the most controversial bill relates to the resolution of banks, intended to avert the island’s second largest lender – Popular (Laiki) – from being declared insolvent once the ECB cuts off the tap.
It aims to set up a ‘Resolution Fund’ which would be activated in the event that a bank is at risk of defaulting or not meeting capitalisation or liquidity requirements.
The bill empowers the Central Bank to act as the ‘Resolution Authority’. In the event of a resolution, shareholders would be the first to take any losses, followed by creditors (depositors).
It states: “creditors of an institution that is subject to resolution will not be in a worse financial position as a result of resolution measures compared to the position they would be in if the said institution was alternatively wound up.”
The language suggests that a bank under resolution would be restructured and its assets sold to compensate uninsured deposits (over €100,000).  In effect, it points to an orderly wind down of Popular.
This ties in with reports that Popular’s restructuring would take the form of a ‘good bank’ ‘bad bank’, where the good bank would be left holding all performing loans and insured deposits, that is accounts with less than €100,000 in them.
The bad bank would house all non-performing loans and accounts with more than €100,000 in them - those not protected by a deposit guarantee.
One of the bills in the pipeline concerns a ‘special tax on credit institutions’ – a one-off bank levy, or haircut, on uninsured deposits.
Earlier in the day, DISY deputy chairman Averof Neophytou said the scheme would secure 100 per cent of the insured deposits belonging to 361,000 people out of a total of 371,000.
Passage of the bill would ensure that the 8,000 people employed by Popular would not lose their jobs, Neophytou said.
The levy on deposits of over €100,000 in Popular would generate €2.3 billion out of the €5.8 billion that Cyprus must raise.
According to online news outlet Stockwatch, the some 10,000 depositors with over €100,000 would see their money transferred to the ‘bad bank’ along with the other bad debt, but they would be compensated over the long term.
The nine bills were hurriedly drafted after the Cabinet gave the go-ahead, as a succession of meetings took place at the Presidential Palace.
Rumours during the day that Popular would be wound up rallied hundreds of protesters – the majority bank employees – outside the parliament building, cordoned off by the police.
The demonstrators jostled with riot police, chanting slogans and holding up placards, one of which read: “No to the Fourth Reich” – an allusion to EU paymaster Germany, perceived as pulling the strings on a Cyprus bailout.
Popular imposed a €260 euro per day limit on ATM withdrawals to cope with high demand, as customers queued to withdraw funds on hearsay that the bank was to be closed down.
The Central Bank later issued a statement denying the reports.
In the evening, eurozone finance ministers held a teleconference to take stock on developments here.
“The Eurogroup stands ready to discuss with the Cypriot authorities a draft new proposal, which it expects the Cyprus authorities to present as rapidly as possible,” it said in a statement.
A spokesman for European Union Monetary Affairs Commissioner Olli Rehn welcomed Cypriot authorities’ assurances that they would present in detail to the troika their alternative proposal for covering the part of Cyprus’ financing needs outside of the agreed financing envelope.
“We are conditionally satisfied that the bills on bank resolution and restriction of capital movements are moving through the legislative process. Vice President Rehn has been calling for the immediate adoption of these laws, which are absolutely essential at the current juncture,” the spokesman said.
“We now need to move into top gear and work intensively with the Cypriot government and our troika partners to design a viable alternative solution that can be acceptable to all euro area member states," he concluded.
Meanwhile the news from Moscow did not sound good. Finance Minister Michalis Sarris, in the Russian capital for talks on possible assistance, did not seem to have made much headway.
Last night the Cyprus News Agency cited Russian officials as saying the only thing under discussion was an extension on an existing €2.5 billion loan.
Sarris spoke on the phone with President Nicos Anastasiades earlier on in the evening.

Long queues outside Laiki cash machines lasted all day yesterday

THE RESTRUCTURING of Laiki Bank, which should have been undertaken many months ago, has now been forced on us. The long queues at the bank’s ATMs yesterday could have been described as a bank run, its customers having lost all confidence in Laiki and seeking to salvage funds. The resolution of the bank which had already been prepared by the Central Bank will now be put into force.
Meanwhile as angry bank employees gathered outside the legislature to protest about the closure of Laiki, President Anastasiades called a second meeting with the party leaders last night to discuss the matter of controlled bankruptcy. The irony is that six hours earlier, party leaders left the presidential palace in upbeat mood having unanimously decided the establishment of a Solidarity Fund. This would take all liquid assets from the provident funds of the semi-governmental organisations (estimated in the region of €1.2bn) and, in exchange, issue them with shares in the natural gas enterprise.
This money would go towards reducing the percentage of the levy on deposits. The restructuring of Laiki would reduce the banks’ capital needs by another €2bn which, in theory, would mean that Cyprus would be looking to raise only €2.6bn from the bail-in of deposits to come up with the €5.8bn being demanded by the troika. We say in theory, because the Eurogroup could decide that the international lenders benefited from the lower capital needs of the banks. Even yesterday German politicians were insisting that the big depositors - the Russians - took a hit.
The problem is that our politicians are not in complete control and by delaying the decision on the deposits’ haircut they have even less control. President Anastasiades warned of the big risk of rejecting the bail-in. The fact that the restructuring of Laiki, although inevitable, was forced on us while the bank was closed, creates the impression that the government has lost control of the situation. Could the same thing happen to the Bank of Cyprus, while our populist politicians are engaging in defiant rhetoric and waiting for Russia to save us?
This could further reduce our bail-out fund, eliminate the need for a deposits’ hair-cut and reduce the banking sector to a size acceptable to the EU. The hair-cut of the deposits in these two banks would be six or seven times the 9.9 per cent that the government bill that was rejected on Tuesday envisaged. The danger of the Bank of Cyprus following Laiki could be averted by government imposing limits on cash withdrawals from the Cyprus banks when they re-open for business on Tuesday, with the tap of emergency liquidity assistance turned off by the ECB.
However the danger of another banking collapse will loom large if we do not agree to a bailout before Tuesday. We hope the political parties will have finally realised that their vacuous grandstanding could prove fatal.


  


 

NICOSIA/MOSCOW, March 22 (Reuters) - Russia rebuffed Cypriot entreaties for aid on Friday, leaving the island's increasingly isolated leaders scrambling to strike a bailout deal with the European Union by next week or face the collapse of its financial system.

In Nicosia, the country's biggest bank urged politicians to make haste and cut a deal with their EU partners as parliament considered proposals to nationalise pension funds, pool state assets and split the country's second-largest bank in a desperate effort to satisfy those exasperated European allies.

The governor of the Central Bank, Panicos Demetriades, warned political leaders the country would face a disorderly bankruptcy on Tuesday unless they approved the bills, an official present at the talks said.

"The next few hours will determine the future of the country," government spokesman Christos Stylianides said before the parliamentary debate. "We must all assume our share of the responsibility."

Even if the measures are approved, there was no confirmation they would raise the 5.8 billion euros demanded by the EU in return for a 10 billion euro ($12.9 billion) bailout to avoid a default.

The biggest local bank, the Bank of Cyprus, urged the government to go back and make a deal from the European Union, under which larger deposits over 100,000 euros, would be taxed. It was preferable, it said, to a collapse of the system and a return to the Cypriot pound which would wipe out assets.

"There must be no further delay," the bank said.

Cypriot insistence on taxing even small savers - in hopes of limiting damage to an offshore banking sector heavily dependent on larger Russian depositors - saw a bailout deal that had been agreed with the EU a week ago rejected by parliament on Tuesday.

Several hundred people rallied peacefully outside parliament on Friday, holding banners saying 'No to the victimisation of banks'. "Our so-called friends and partners sold us out," said Marios Panayides, 65.

"They have completely abandoned us on the edge of an abyss."

Elsewhere, depositors, who have been besieging bank cash machines all week, queued again to withdraw what they could.

The clock was running down to a Monday deadline set by the European Central Bank for a deal to be in struck before it cuts funds to Cyprus's stricken banks, potentially pushing it out of Europe's single currency.

Nicosia angrily rejected a proposed levy on tax deposits in exchange for the EU bailout on Tuesday and turned to the Kremlin to renegotiate a loan deal, win more financing and lure Russian investors to Cypriot banks and gas reserves.

"The talks have ended as far as the Russian side is concerned," Russian Finance Minister Anton Siluanov told reporters after two days of crisis talks with his Cypriot counterpart, Michael Sarris.

Russians have billions of euros at stake in Cyprus's outsized and now crippled banking sector, a factor in the EU's unprecedented demand that bigger depositors take a hit in the interests of keeping Cyprus afloat.

But Siluanov said Russian investors were not interested in Cypriot gas and that the talks had ended without result. Sarris was due to fly home, where lawmakers were locked in yet more crisis talks.

New bills submitted to the Cypriot parliament included a "solidarity fund" to bundle state assets, including future gas revenues and nationalised semi-state pension funds, as the basis for an emergency bond issue.

JP Morgan likened it to "a national fire sale", and euro zone paymaster Germany indicated it opposed the nationalisation of pension funds.

They were also considering a bank restructuring bill that officials said would see the country's second largest lender, Cyprus Popular Bank, split into good and bad assets, and a government call for the power to impose capital controls to stem a flood of funds leaving the island when banks reopen on Tuesday after a week-long shutdown.

There was no silver bullet, however, and Cyprus's partners in the 17-nation currency bloc were increasingly unimpressed. It was unclear whether parliament would even vote on the bills on Friday.

"I still believe we will get a settlement, but Cyprus is playing with fire," Volker Kauder, a leading conservative ally of German Chancellor Angela Merkel, told public television ARD.

Merkel told lawmakers that nationalisation of pension funds was unacceptable as a way to plug a hole in finances and clinch the bailout, parliamentary sources said.

Two lawmakers quoted the chancellor as saying debt sustainability and bank restructuring would have to be the core of any deal, which she called a matter of "credibility".

They also quoted Merkel as saying: "There is no way we can accept that", and "I hope it does not come to a crash".

Her finance minister, Wolfgang Schaeuble, said he did not know whether euro zone finance ministers would meet over the weekend. "I can't say in advance if and when Cyprus will deliver results," he said.

Cypriots have been stunned by the pace of the unfolding drama, having elected conservative President Nicos Anastasiades barely a month ago on a mandate to secure a bailout.

News that the deal would involve a levy on bank deposits, even for smaller savers, outraged Cypriots.

While EU lenders, notably Germany, had wanted larger, uninsured bank depositors to bear some of the cost of recapitalising the banks, Cyprus feared for its reputation as an offshore banking haven and planned to spread the levy to deposits under 100,000 were covered by state insurance.

Senior euro zone officials acknowledged in a confidential conference call on Wednesday that they were "in a mess" and discussed imposing capital controls to insulate the currency area from a possible collapse of the small Cypriot economy.

Cyprus itself refused to take part in the call, minutes of which were seen by Reuters. Several participants described its absence as troubling and reflecting the wider confusion surrounding the island's predicament.

In Brussels, a senior European Union official told Reuters an ECB withdrawal would mean Cyprus's biggest banks being wound up, wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro.

"If the financial sector collapses, then they simply have to face a very significant devaluation, and faced with that situation, they would have no other way but to start having their own currency," the EU official said.

Cypriot banks have been crippled by their exposure to Greece, the centre of the euro zone debt crisis.

On Friday, Greece began transferring the Greek units of Cypriot banks to a Greek banking group, in coordination with the central bank in Cyprus, ending uncertainty for local savers.