Russia rebuffs Cyprus, EU awaits bailout "Plan B"

By Michele Kambas and Lidia Kelly

NICOSIA/MOSCOW (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 nationalize 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 victimization 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.

RUSSIAN REFUSAL

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 nationalized 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 nationalization 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.

"PLAYING WITH FIRE"

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 nationalization 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 recapitalizing 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 center 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.

(Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Karolina Tagaris and Costas Pitas in Nicosia, Georgina Prodhan in Vienna, Lidia Kelly and Darya Korsunskaya in Moscow, Paul Carrel in Frankfurt and Gernot Heller in Berlin; Writing by Matt Robinson; Editing by Philippa Fletcher and Alastair Macdonald)

Source: http://news.yahoo.com/cyprus-risks-euro-exit-eu-bailout-ultimatum-064335642--business.html

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