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.
Continue Reading Below
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 nationalizing 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 program 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.
There were long queues at some bank branches in Nicosia as staff replenished cash machines, which have continued to operate while banks have been closed since last week.
In Moscow, Cypriot Finance Minister Michael Sarris said he was discussing possible Russian investments in the island's banks and energy resources to reduce its debt burden, as well as an extension of an existing 2.5-billion-euro Russian loan.
Russian citizens have billions of euros to lose in the island's outsized, teetering banking sector.
"The banks are the ultimate objective in any support we get, so it'll either be a direct support to the banks or the support that we get through other sectors will be channeled to the banks," Sarris told Reuters during a second day of talks with his Russian counterpart, Anton Siluanov.
He said Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry had said on Monday that Nicosia sought an extra 5 billion euro loan.
The chairman of euro zone finance ministers, Dutchman Jeroen Dijsselbloem, told the European Parliament Moscow had informed the EU that it had no intention of plowing more money into Cyprus beyond the existing loan.
"Any other options, to go further, another loan or an investment in the banks, the Russians let us know that they are not willing to do that," he said. "Of course, the Cypriot government is now talking to the Russian government whether more can be done, I don't know the outcome of that yet."
Dijsselbloem said new loans from Russia would anyway not solve the debt issue, and that a revised levy on larger bank deposits was still on the table.
"I'm not sure that this package is completely gone and failed, because I don't see many alternatives," he told the European Parliament in Brussels.
EU officials believe at least some of the 5.8 billion they are demanding should come from the 68 billion euros in Cypriot banks, 38 billion of which are in the form of large deposits of more than 100,000 euros, mainly from foreigners.
But hitting small savers caused visceral outrage, and the Cypriot government fears that foisting too big a burden on large depositors would wreck the offshore financial industry that forms much of the country's economy.
Among the other options, nationalizing pension funds of semi-public companies could yield between 2 billion and 3 billion euros, although European officials say it would raise less. Issuing bonds linked to future natural gas revenue is problematic because pumping any gas is years away.
Doubts about the fate of the small nation of just 1.1 million people has shaken confidence in the single-currency euro zone and raised geopolitical tension between the EU and Russia.
Russian Prime Minister Dmitry Medvedev, who meets a European Commission delegation in Moscow on Thursday, said the bloc had behaved "like a bull in a china shop". He likened EU proposals, which would force Russian customers to contribute to the rescue of Cypriot banks, to Soviet-era expropriations.
Tuesday's parliamentary vote marked a stunning rejection of the kind of strict austerity accepted over the past three years by crisis-hit Greece, Portugal, Ireland, Spain and Italy.
European officials maintained the pressure on Nicosia.
"I cannot rule out a Cyprus insolvency," Austrian Finance Minister Maria Fekter said in an interview with the newspaper Oesterreich. "A euro exit would not achieve anything. Cyprus must act now."
With Cypriot Energy Minister George Lakkotrypis also in Moscow, officially for a tourism exhibition, speculation was rife that access to untapped offshore gas reserves could be on the table as part of a deal for Russian aid.
Cyprus is a haven for billions of euros squirreled abroad by Russian businesses and individuals - one of the reasons why Germany and other northern euro zone states are reluctant to bail it out without a contribution from bank depositors.
The island's banking sector was hollowed out by its exposure to bigger neighbor Greece.
The proposed levy on deposits would have taken nearly 10% from accounts over 100,000 euros. Smaller accounts would also have been hit, although the government proposed softening the blow to spare savers with less than 20,000 euros.
Cypriots were enraged at the proposal to tax accounts with less than 100,000 euros, which are meant to be protected by state guarantees across the European Union.
Marinos Panaretou, a 36-year-old retail manager, said he had been withdrawing the maximum 500 euros every day since Saturday, when news broke of the proposed levy.
"People feel safer if we have cash on us because you don't know what you're going to wake up to," he said. "Quite simply, you don't know what's going to happen tomorrow."
European officials say the Cypriot government could have protected small savers if it imposed a higher tax on big deposits, but it refused to do so to protect the rich foreign clients of its offshore banking business.
EU leaders are growing increasingly exasperated with Cyprus, while the threat of bankruptcy for a member of the euro zone, however small, raises fears for confidence in the currency.
"There is no obligation to accept help," said Polish Foreign Minister Radoslaw Sikorski, whose country does not use the euro. "Cyprus has the possibility of living with its own mistakes." ($1 = 0.7722 euros)