* Germany insists Cyprus hit banks to win bailout
* Merkel ally says Nicosia "playing with fire"
* German parties, media support tough Berlin stance
By Noah Barkin
BERLIN, March 22 Europe's paymaster Germany
stepped up pressure on stricken Cyprus on Friday, rejecting its
proposal to nationalise pension funds to plug its finance gap
and demanding it take an axe to its banks if it wants a bailout.
Chancellor Angela Merkel stuck to the hard line Berlin has
been pushing for weeks, telling lawmakers that while she wanted
to keep Cyprus in the euro zone, the country must first
recognise it had no future as an offshore financial centre for
wealthy Russians and Britons.
One of her conservative allies took to the airwaves to warn
Cyprus it was playing a risky game by refusing to impose losses
on depositors in its banking sector, which has swollen to eight
times the size of the economy and is on the brink of collapse.
"I still believe we will get a settlement, but Cyprus is
playing with fire," Volker Kauder, parliamentary leader for
Merkel's Christian Democrats (CDU), told ARD public television.
The tough rhetoric from Berlin came as Russia rebuffed
Cypriot demands for aid, leaving the island's increasingly
isolated leaders mere days to satisfy their European partners or
face a default that could reverberate across the 17-nation bloc.
EU leaders are now awaiting a "Plan B" from Cyprus. The
government must come up with 5.8 billion euros by Monday, the
day the European Central Bank has said it will cut off funds to
A closely-watched survey of German business morale on Friday
showed that after a lull to start the year, the euro crisis was
unnerving domestic firms again. The indicator from the
Munich-based Ifo institute fell for the first time in five
With just six months to go until Germany holds an election,
a poll for ZDF television showed that average Germans are also
growing worried, with nearly two-thirds expecting the crisis to
worsen and nearly half fearful for their savings.
In previous bailout standoffs with euro members like Greece,
Merkel has demanded a high price for aid only to compromise at
the last minute in order to avert disaster.
But with tiny Cyprus, a Mediterranean island of just a
million inhabitants, she seems determined not to bend, even if
that leads to bankruptcy.
"VICTORY FOR BLACKMAIL"
Comforting the Germans in their stance has been the relative
calm of financial markets since the crisis in Cyprus flared up.
On Friday, the German benchmark stock index and
most other European bourses were in positive territory, while
the bonds of peripheral euro zone states like Spain and Italy
were also trading higher.
That was partly due to a deal struck on Friday whereby
Greece agreed to take over local units of stricken Cypriot
banks, shielding its own financial sector from the fallout.
But it also suggested contagion from Cyprus may be limited,
as German politicians have suggested in recent days.
Zsolt Darvas of Brussels-based think tank Bruegel said
back-tracking by Berlin and other euro zone states at this point
would be seen as a "victory for blackmail".
German media have also been withering in their criticism of
the Cypriot government, which insisted at a euro zone meeting in
Brussels a week ago that small savers in its banks be hit in
order to limit losses on wealthy depositors.
President Nicos Anastasiades, elected only a few weeks ago,
appears intent on preserving an economic model that relies on
attracting billions of euros in foreign deposits, mainly from
Russia, with loose regulations and low taxes.
Merkel explained in a closed-door session with conservative
lawmakers, according to participants, that she considered this
model dead and that Cyprus could not expect aid until it too