WRAPUP 2-Cyprus scrambles to avert meltdown, EU threatens cutoff

Thu Mar 21, 2013 4:18am EDT

* Finance minister discussing banking, energy cooperation with Russia

* President meets party leaders on "Plan B"

* ECB threatens to cut off funding to Cypriot banks

* Russia says EU behaving like "bull in a china shop"

By Michele Kambas and Lidia Kelly

NICOSIA/MOSCOW, March 21 (Reuters) - Cypriot politicians searched desperately on Thursday for a "Plan B" to find billions of euros to clinch a European Union bailout and avert a financial meltdown after parliament rejected a bank deposit levy.

President Nicos Anastasiades, a month in office and facing his country's worst crisis since a 1974 Turkish invasion, met party leaders to work out how to raise 5.8 billion euros demanded by the EU under a 10 billion euro ($13 billion) rescue.

Cyprus has faced the prospect of bankruptcy since Tuesday when its tiny parliament voted unanimously against a levy on bank deposits to raise the cash, which politicians denounced as "bank robbery".

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

Cyprus was also looking to Russia, whose citizens have billions of euros to lose in the island's outsized and now-teetering banking sector.

In Moscow since Tuesday, Cypriot Finance Minister Michael Sarris said the two countries were discussing cooperation in the banking and energy sectors in addition to a new loan of 5 billion euros.

"We've asked for help clearly, but something that would make also economic sense for Russia," he told reporters during a second day of talks with his counterpart, Anton Siluanov.

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 big deposits of more than 100,000 euros, mainly from foreigners.

But hitting small depositors causes visceral outrage, while the government believes that hitting large depositors too hard would destroy the offshore financial industry that forms much of the country's economy.

Among the other options, nationalising pension funds of semi-public companies could yield between 2 billion and 3 billion euros. Issuing bonds linked to future natural gas revenue is problematic because pumping any gas is years away.

Banks, shut since the weekend, were to stay closed for the rest of the week and so not reopen till Tuesday after a holiday weekend, extending the misery of Cypriot businesses already feeling the pinch. The Cypriot stock exchange also extended a trading suspension to Thursday and Friday.

Cypriots still have access to cash for now as bank machines which were emptied at the weekend have been restocked.

INSOLVENCY

Doubts about the fate of the small nation of just 1.1 million has shaken confidence in the single-currency euro zone and raised geopolitical tension between the EU and Russia.

Russian Prime Minister Dmitry Medvedev, who was preparing to meet an EU Commission delegation in Moscow on Thursday, said the bloc had behaved "like a bull in a china shop" and likened its proposals, which would force Russian customers to contribute to the rescue of Cypriot banks, to Soviet-era confiscations.

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.

But the European Central Bank kept the pressure on, warning that it would have to pull the plug on Cyprus unless the country, one of the smallest of the 17 members of the euro zone, took a bailout quickly.

"I cannot rule out a Cyprus insolvency," Austrian Finance Minister Maria Fekter said in an interview with the Austrian 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 neighbour Greece.

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.

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.

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, 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."

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