Cyprus ordered its banks to remain closed until next week as the cabinet held emergency talks on Wednesday in an effort to strike a deal with the EU or Russia to avert financial meltdown and stave off bankruptcy.
After the country's parliament rejected a plan to provide €5.8bn (£5bn) by seizing a portion of bank deposits from anyone with a bank account, Cyprus is struggling to come up with a plan that will let it access an EU bailout to stop its banks failing.
The country's eurozone partners and the International Monetary Fund (IMF) are ready to provide €10bn in an emergency bailout if Cyprus comes up with an extra €7bn itself. Most of the bailout money is needed to shore up the country's oversized banking sector, with the rest for government finances.
No clear "plan B" had emerged after meetings between politicians and representatives of European partners and the IMF. The Cypriot cabinet was said to be discussing ideas including the nationalisation of pension funds of semi-government corporations, which hold €2bn-€3bn, and another form of levy on deposits. The talks were due to resume
Another option debated may have been natural gas bonds linked to hydrocarbon reserves discovered off Cyprus, which remain uncertain and will not be exported until at least 2019.
It was unclear whether European partners would accept the idea of turning to pension fund assets, which could leave the government exposed to further debts.
"We don't have days or weeks, we have only hours to save our country," Averof Neophytou, deputy leader of the ruling Democratic Rally party, told reporters as crisis talks in Nicosia dragged on into the evening.
Banks in Cyprus will now not open until Tuesday at the earliest, because Monday is a bank holiday. They have been shut since last week to prevent a run on deposits. The country's two main banks – Laiki and the Bank of Cyprus – face potential failure if a bailout is not secured. One official told the Associated Press that Europe and the IMF were pressing for the two banks to be wound down. The Cypriot government was said to be considering the possibility of imposing capital controls amid fears that money would flood out of the country once its banks were reopened.
With the EU deal uncertain, Cyprus was set to launch a second day of talks with its ally Russia in Moscow on Thursday over a multibillion-dollar loan. The Cypriot finance minister, Michael Sarris, held inconclusive negotiations with Russian officials, but said he would stay in Moscow "as long as it takes" to reach a deal.
"We had a very good first meeting, very constructive, very honest discussion," Sarris said after meeting Anton Siluanov, Russia's finance minister. "We've underscored how difficult the situation is." But he said there were "no offers, nothing concrete".
With an estimated $31bn (£21bn) held in Cypriot banks by Russian banks, businesses and individuals, as well as up to $40bn in loans to Cyprus-registered firms, Russia has been gripped by fear since the crisis began to unfold, with state-run television transmitting rare live reports from outside the Cypriot parliament.
Yet the Kremlin's reputation for seeking hard assets abroad in exchange for aid prompted speculation that negotiations were dragging as it bargained for stakes in offshore gas fields and Cypriot banks. Gas fields discovered in 2011 could be worth many times Cyprus's GDP but the exact potential revenue stream is uncertain.
Much speculation has fallen on Gazprom, the state gas monopoly that has often been dubbed a tool of Kremlin foreign policy. A spokesman shrugged off speculation that it was seeking exploration rights for gas deposits in the Mediterranean. "There have been a lot of fantasies in the press," a Gazprom spokesman, Sergei Kupriyanov, said. "We have made no proposals." He said no Gazprom officials took part in Wednesday's talks.
The appearance in Moscow of George Lakkotrypis, Cyprus's minister for energy, commerce, industry and tourism, only fuelled the speculation. Cypriot officials said he was visiting a tourism exhibit.
On Wednesday, Russian prime minister Dmitry Medvedev criticised the EU's handling of the Cyprus crisis, describing it as a "bull in a china shop" and adding that the bank deposit levy reminded him of Soviet-era policies that, he said, robbed Russians of their savings.
The Russian press reported that Gazprombank, a subsidiary of the gas group, was interested in Laiki Bank. The Cypriot government denied reports that it had been sold to foreign investors.
Charles Robertson, global chief economist at Renaissance Capital, a Russian bank, said a bid for gas fields would fit with Russian president Vladimir Putin's strategy of using natural resources to boost Russia's influence. "I could see some potential deal around the natural gas fields – energy is something that Putin believes makes the country powerful," he said. "It would fit with his long-term agenda."
A deal on banks appeared less likely, he said, particularly considering Russian clients were now seeking to move funds out of Cyprus and its banks were looking less than healthy.
Teetering Cypriot banks have been crippled by their exposure to the financial crisis in neighbouring Greece, where the eurozone debt crisis began.
The uncertain situation in Cyprus is "very damaging" and needed to be addressed immediately, the EU Council president, Herman Van Rompuy, told the European parliament.
Angela Merkel, the German chancellor, said Cyprus's banking sector, which through foreign funds attracted by low tax deals has swelled to eight times the country's GDP "is not sustainable".
The European Central Bank's chief negotiator on Cyprus, Jörg Asmussen, said the ECB would have to pull the plug on Cypriot banks unless the country took a bailout quickly. "We can provide emergency liquidity only to solvent banks and … the solvency of Cypriot banks cannot be assumed if an aid programme is not agreed on soon, which would allow for a quick recapitalisation of the banking sector," Asmussen told the German weekly Die Zeit on Tuesday. Austria's chancellor, Werner Faymann, said he could not rule out Cyprus leaving the eurozone, although he hoped its leaders would find a solution for it to stay.
Cyprus's Orthodox church said it was willing to mortgage its assets to invest in government bonds. The church has considerable wealth, including property, stakes in a bank and a brewery.
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