* ECB says to cut off bank funds without bailout deal by
* President, party leaders agree "solidarity fund"
* Finance minister discussing banks, energy deals with
* Central bank says will rescue second biggest bank
By Michele Kambas and Matt Robinson
NICOSIA, March 21 The European Union gave Cyprus
till Monday to raise the billions of euros it needs to secure an
international bailout or face a collapse of its financial system
that could push it out of the euro currency zone.
In a sign it was at least preparing for the worst, the
Cypriot government sought powers on Thursday to impose capital
controls to stem a flood of funds leaving the island if there is
no deal before banks reopen following this week's shutdown.
In stark warnings earlier in the day, the European Central
Bank said it would cut off liquidity to Cypriot banks and a
senior EU official made clear to Reuters that the bloc was ready
to see the bankrupt island banished from the euro in the belief
it could then contain damage to the wider European economy.
The ECB ultimatum came as the island's leaders struggled to
craft a "Plan B" to raise the 5.8-billion euro contribution
demanded by the EU in return for a 10-billion euro ($13-billion)
bailout from the EU and IMF; angry Cypriot lawmakers threw out a
tax on deposits, calling the EU-backed proposal "bank robbery".
In a mark of strained relations and confusion, euro zone
officials conceded on a Wednesday conference call that Cyprus
refused to join that the situation was "in a mess".
After more talks on Thursday evening, the currency union's
finance ministers urged Cyprus to table a new proposal that
would, Dutch chairman Joreon Dijsselbloem said, respect "the
parameters defined earlier".
As parliament convened late in the day, the government
submitted a bill seeking the power to impose capital controls on
banks, a type of measure unseen since before the country joined
the single currency bloc five years ago.
It also proposed a "solidarity fund" that would bundle state
assets, including future gas revenues, as the basis for an
emergency bond issue, likened in a note by JP Morgan to "a
national fire sale".
The speaker of parliament, Yiannakis Omirou, insisted a
revised levy on uninsured bank deposits was not on the table.
ECB PATIENCE FLAGS
The European Central Bank, which has kept Cyprus's banks
operating with a liquidity lifeline, said the government had
until Monday to get a deal in place, or funds would be cut off.
"Thereafter, Emergency Liquidity Assistance (ELA) could only
be considered if an EU/IMF programme is in place that would
ensure the solvency of the concerned banks," the ECB said.
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.
Bank branches have been closed all week and are not due to
reopen until Tuesday, though ATMs have continued to issue cash.
Several hundred protesters, many of them bank employees,
rallied outside parliament after rumours the second-largest
lender, Cyprus Popular Bank, was to be wound up.
Demonstrators chanted "Hands off the bank!" and several
jostled with riot police, briefly breaking through a cordon.
Cyprus has so far avoided the kind of unrest seen in
neighbouring Greece, the centre of the euro zone debt crisis and
the origin of many of the losses undermining Cypriot banks.
Until this week, the expectation in Brussels and on
financial markets had been that the election of a new Cypriot
president in February would smooth the path to a bailout deal.
But although conservative President Nicos Anastasiades
struck a deal last weekend in Brussels, it was unanimously
rejected by parliament on Tuesday. While EU lenders, notably
Germany, wanted uninsured bank depositors to help ease banks'
debts, Cyprus feared for its future reputation as an offshore
banking haven and planned to spread the tax also to small savers
whose deposits under 100,000 were covered by state insurance.
In Moscow, Cypriot Finance Minister Michael Sarris said he
was discussing possible Russian investments in banks and energy
resources to reduce its debt burden, as well as an extension of
an existing 2.5-billion-euro Russian loan.
"The banks are the ultimate objective in any support we get,
so it'll either be a direct support to the banks or the support
that we get through other sectors will be channelled to the
banks," Sarris told Reuters during a second day of talks with
his Russian counterpart, Anton Siluanov.
He said Cyprus had no plans to borrow more money from Russia
and add to its debt mountain. The Russian Finance Ministry had
said on Monday that Nicosia sought an extra 5-billion-euro loan.
Eurogroup chairman Dijsselbloem told the European Parliament
in Brussels that Moscow had informed the EU it had no intention
of ploughing more money into Cyprus beyond the existing loan.
"Any other options, to go further, another loan or an
investment in the banks, the Russians let us know that they are
not willing to do that," he said, adding that that might change.
But Dijsselbloem said new loans from Russia would in any
case not solve the country's debt problem, and that a revised
levy on larger bank deposits was also still a possibility.
"I'm not sure that this package is completely gone and
failed, because I don't see many alternatives," he said.
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.
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 is in large deposits of more than
100,000 euros, mainly from Russians and other foreigners.
While the proposal to hit small savers caused outrage, the
Cypriot government fears that foisting too big a burden on large
depositors would wreck the offshore financial industry that
accounts for 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.