WRAPUP 2-Russia rebuffs Cyprus, EU awaits bailout "Plan B"

Fri Mar 22, 2013 4:54am EDT

* Russian finance minister says talks end without result

* ECB says to cut off bank funds without bailout deal by Monday

* Cypriot leaders mull "solidarity fund", capital controls

By Michele Kambas and Lidia Kelly

NICOSIA/MOSCOW, March 22 (Reuters) - Cyprus's finance minister left Moscow empty-handed on Friday after Russia turned down appeals for aid, leaving the island to strike a bailout deal with the European Union before Tuesday or face the collapse of its financial system.

The rebuff left Cyprus looking increasingly isolated, with the deadline looming to find billions of euros demanded by the EU in return for a 10 billion euro ($12.93 billion) bailout.

Without it, the European Central Bank said on Wednesday it would cut off emergency funds to the country's teetering banks, potentially pushing Cyprus out of Europe's single currency.

"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.

Having angrily rejected a proposed levy on tax deposits in exchange for the EU bailout, Nicosia had turned to the Kremlin to renegotiate a loan deal, win more financing and lure Russian investors to cut-price Cypriot banks and gas reserves.

Wealthy Russians have billions of euros at stake in Cyprus's outsized and now crippled banking sector.

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 preparing to debate measures proposed by the government to raise at least some of the 5.8 billion euros required to clinch the EU bailout.

They included a "solidarity fund" bundling state assets, including future gas revenues and nationalised pension funds, as the basis for an emergency bond issue and likened by JP Morgan to "a national fire sale".

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.

There was no silver bullet, however, and Cyprus's partners in the 17-nation currency bloc were growing increasingly unimpressed.

"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 nationalisation of pension funds was unacceptable as a way to plug a hole in finances and clinch the bailout, parliamentary sources said. They 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".

"IN A MESS"

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 that 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 centre of the euro zone debt crisis.

There were long queues at ATMs on Thursday and angry scenes outside parliament, where hundreds of demonstrators gathered after rumours spread that Popular Bank would be closed down and its staff laid off.

"We have children studying abroad, and next month we need to send them money," protester Stalou Christodoulido said through tears. "We'll lose what money we had and saved for so many years if the bank goes down."

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, who raided cash machines last weekend.

While EU lenders, notably Germany, had wanted uninsured bank depositors to bear some of the cost of recapitalising the banks, Cyprus feared for its future reputation as an offshore banking haven and planned to spread the burden also to small savers whose deposits under 100,000 were covered by state insurance.