WRAPUP 2-Cyprus seeks Russian rescue, EU threatens cutoff

Wed Mar 20, 2013 2:48pm EDT

* Finance minister says no deal on Russian aid yet

* Parliament unanimously rejects EU-driven deposit tax

* ECB threatens to pull plug on Cyprus banks soon

* Govt orders banks to stay shut until March 26

By Michele Kambas and Lidia Kelly

NICOSIA/MOSCOW, March 20 (Reuters) - Cyprus ordered banks to stay shut until next week as the government scrambled on Wednesday to avert a financial meltdown after rejecting the terms of a bailout from the European Union and turning instead to Russia for a lifeline.

"We don't have days or weeks, we have only hours to save our country," Averos Neophytou, deputy leader of the ruling party Democratic Rally, told reporters as crisis talks in Nicosia dragged into the evening. Banks are to stay shut for the rest of the week and so not reopen till Tuesday after a holiday weekend.

With Finance Minister Michael Sarris in Moscow, Russia's finance ministry said Cyprus 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 from Moscow. Russia has a special interest, since many of its citizens keep savings in Cyprus.

In a vote on Tuesday, the island's tiny legislature 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.

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

Businesses in Cyprus are already feeling the pinch, with people reduced to limited withdrawals from cash machines. The island's banking sector has been crippled by its exposure to bigger neighbour Greece, where Europe's debt crisis began.

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.

Cypriots had balked at EU demands for a levy on bank deposits to raise 5.8 billion euros, an unprecedented measure that opponents said would have violated the principle behind an EU-wide guarantee on deposits of up to 100,000 euros.

Cyprus Energy Minister George 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.

"NO OFFERS"

"We had a very honest discussion. We've underscored how difficult the situation is," Sarris told reporters after talks with his Russian counterpart Anton Siluanov in Moscow.

"We'll now continue our discussion to find the solution by which we hope we will be getting some support," he said.

"There were no offers, nothing concrete."

Moscow has its own interests in ensuring the survival of banks in Cyprus, a haven for billions of euros squirreled abroad by Russian businesses and individuals - a factor, too, in the reluctance of Germany and other northern euro zone states to bail out Cypriots without a contribution from bank depositors.

Speculation was rife over the shape Russian help might take. Government spokesman Christos Stylianides denied a Greek media report that Cyprus had reached a deal for Russian investors to buy the island's second largest bank, Cyprus Popular, which was taken over by the state last year.

The proposed levy on deposits would have taken nearly 10 percent 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.

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 euros - 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.

President Nicos Anastasiades, a conservative elected just last month with a mandate to secure a bailout, held meetings with party leaders, his cabinet and officials from the "troika" of lenders from the EU, ECB and International Monetary Fund.

While taxing even small savers was politically explosive, the Cypriot government had balked at sparing them by imposing a higher tax on big depositors - fearing for an offshore banking business that accounts for a big share of its economy.

"PLAN B"

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 euros.

An opposition politician present at Wednesday'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 euro amount by passing the Cypriot banks into Russian hands."

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.

With Sarris and 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.

"We at Gazprom did not offer Cyprus anything," Gazprom's spokesman, Sergei Kupriyanov, said.

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 source told Reuters.

"The Cypriots are leaving us really confused."

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