UPDATE 3-Cyprus seeks Russian bailout aid, EU threatens cutoff

Wed Mar 20, 2013 7:44am EDT

* Cyprus finance minister says no deal on Russian aid yet

* Parliament votes 36-0 to reject EU-driven tax on deposits

* ECB threatens to pull plug on Cyprus banks soon

* Cypriot, Russian presidents talk by phone, energy minister in Moscow

By Michele Kambas and Karolina Tagaris

NICOSIA, March 20 (Reuters) - Cyprus pleaded for a new loan from Russia on Wednesday to avert a financial meltdown, but won no immediate relief after the island's parliament rejected the terms of a European bailout, raising the risk of default and a bank crash.

Finance Minister Michael Sarris said in Moscow he had reached no deal with his Russian counterpart Anton Siluanov, but talks would continue.

Russia's finance ministry said Nicosia had sought a further 5 billion euros on top of a five-year extension and lower interest on an existing 2.5 billion euro loan.

Cyprus has to seek Moscow's help after the euro zone's plan for a 10 billion euro bailout was cast into disarray on Tuesday when the island's parliament rebuffed EU demands for a levy on bank deposits to raise 5.8 billion euros.

Moscow has its own interests in ensuring the survival of Cypriot banks, which have served as an offshore financial haven for Russian businesses and individuals.

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 conducted on Tuesday evening.

Austrian Chancellor Werner Faymann said he could not rule out Cyprus leaving the euro zone, although he hoped its leaders would find a solution for it to stay.

Cypriot officials disclosed that the country's energy minister was also in Moscow, ostensibly for a tourism exhibition, fuelling speculation that access to offshore gas reserves could be part of any deal for Russian aid.

Cyprus has found big gas fields in its waters adjoining Israel but has yet to develop them.

"We had a very honest discussion, we've underscored how difficult the situation is," Sarris told reporters after talks with Siluanov. "We'll now continue our discussion to find the solution by which we hope we will be getting some support.

"There were no offers, nothing concrete," he said.

Not a single Cypriot lawmaker voted for the bailout, which included a proposed levy that would have taken up to 10 percent from accounts over 100,000 euros.

Smaller bank accounts would also have been hit, although the government proposed to spare small savers with less than 20,000 euros in the bank.

It was the first time a national legislature had rejected the conditions for EU assistance, after three years in which lawmakers in Greece, Ireland, Portugal, Spain and Italy all accepted biting austerity measures to secure aid.

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 savers with deposits over 100,000 euros to contribute to the bailout.

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

"PLAN B"

Nicosia was eerily quiet on Wednesday, the morning after demonstrators cheered parliament's rejection of what was seen as an unfair EU diktat.

The government has not allowed banks to reopen this week to prevent a run, but cash machines which were emptied over the weekend have been replenished, giving people access to limited amounts of cash.

"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.

President Nicos Anastasiades, barely a month in the job, met party leaders and the governor of the central bank at his office. Government spokesman Christos Stylianides said a "Plan B" was in the works.

"A team of technocrats has gone to the central bank to discuss a plan B related to financing and reducing the 5.8 billion euro amount," he told reporters during a break in the meeting with party leaders. He did not elaborate.

Lawmaker Marios Mavrides told Reuters one option under discussion was to nationalize pensions funds of semi-government corporations, which hold between 2 and 3 billion euros.

Anastasiades was also due to hold a cabinet meeting and talk with officials from the so-called "troika" of the EU, European Central Bank and International Monetary Fund.

Among the most urgent decisions awaited was whether the government will allow banks to reopen as planned on Thursday, or keep them closed until next week. Deputy Central Bank governor Spyros Stavrinakis said no decision had been taken yet.

The crisis is unprecedented in the history of the divided east Mediterranean island of 1.1 million people, which suffered a war with Turkey and ethnic split in 1974 in which a quarter of its population was displaced. The Turkish-populated north considers itself a separate country, recognised only by Turkey.

While Brussels has emphasised that the tax measure was a one-off for a country that accounts for just 0.2 percent of Europe's output, fears have grown that savers in other, larger European countries might be spurred to withdraw funds.

GAS DEPOSITS

Leaders of the currency union said the bailout offer still stood, provided the conditions were met. Teetering Cypriot banks have been crippled by their exposure to the financial crisis in neighbouring Greece, where the euro zone debt crisis began.

Germany, facing an election this year and increasingly frustrated with the mounting cost of bailing out its southern partners, said Cyprus had no one to blame but itself.

With Sarris and Energy Minister George Lakkotrypis in Moscow, there was mounting speculation that Russian oil and gas giant Gazprom had mooted its own assistance plan in exchange for exploration rights to Cyprus's offshore gas deposits.

Noble Energy reported a natural gas recovery of 5 to 8 trillion cubic feet of gas south of Cyprus in late 2011, in the island's first foray to tap offshore resources.

A senior source in the "troika" said dealing with Cyprus was even more frustrating than protracted wrangling with Greece.

"The Greeks wanted to cheat on you all the time, but they knew what they wanted. The Cypriots are leaving us really confused," the source said.

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