VIENNA The European Central Bank will not provide Cypriot banks with liquidity indefinitely unless a bailout is agreed and banks there may not be able to reopen this week as a result, Austrian Finance Minister Maria Fekter said.
Cyprus threw a proposed international rescue into disarray on Tuesday by overwhelmingly rejected a proposed levy on bank deposits that was a condition for a 10 billion euro bailout.
Its banks, currently closed, are dependent on emergency funding from the ECB, which has said it will continue to provide liquidity but only under existing rules which say that they must be solvent.
If Cyprus does not come up with a new plan, Fekter told reporters: "Then the banks won't open on Friday because the ECB will not provide any more liquidity. That is a more horrible scenario than what is on the table now."
"We will certainly help the Cypriots but only under conditions that make sense. Certainly neither the ESM (euro zone bailout fund) nor the ECB can allow a bottomless pit," she said.
As things stand, the banks are due to open on Thursday although there is speculation that may be delayed to allow more work on finding a solution that keeps the euro zone member and its banks afloat.
Fekter reiterated that European officials would not accept any measures that increased Cyprus's debt further.
She said she would have liked to see a debt haircut imposed on bondholders of major Cypriot banks rather than the controversial levy on deposits.
"Germany, the International Monetary Fund and Austria as well would have preferred a bail-in, but France and a large part of the other ministers preferred this levy," she said.
She said a bail-in fund created by imposing a roughly 38 percent haircut on debt of the two big Cyprus banks would have cut debt by more than 6 billion euros.
She said the Cypriot case was serious but posed no danger to the wider euro zone. "Not at all. The euro zone is stable."
The problem was that the small Cypriot economy couldn't shoulder an oversized financial sector, Fekter said, adding: "You cannot explain to Austrian taxpayers why we should be securing Russian oligarchs' deposits or British money."
(Reporting by Michael Shields; editing by Patrick Graham)