The European Central Bank warned Thursday it was ready to pull the plug on emergency funding for Cyprus banks as the island's politicians scrambled to raise billions of euros to head off financial meltdown.
People wait in line to withdraw money from an ATM of a Laiki (Popular) Bank branch in the centre of the capital, Nicosia on March 21, 2013. The European Central Bank warned it was ready to pull the plug on emergency funding for Cyprus banks as the island's politicians scrambled to raise billions of euros to head off financial meltdown.
The ECB said Cyprus had until Monday to clinch a bailout deal or funds would be cut off, while an EU source warned that unless the island pushed a workable plan through parliament and overhauled its banking sector by Tuesday it risked being kicked out of the eurozone.
The government urged against panic while scrambling out a "Plan B" to resolve the chaos unleashed by an initial plan to tax bank accounts -- many of them Russian -- by 5.8 billion euros ($7.47 billion) to complement 10 billion euros in eurozone and IMF loans between now and 2016.
Part of the package, a government statement said, involves setting up a "solidarity investment fund," which media reported would nationalise provident funds, with bonds issued against future natural gas revenues.
Finance Minister Michalis Sarris, in Moscow seeking Russian help in bailing the island out of its financial mire, told the Cyprus News Agency (CNA) he is looking to persuade Moscow to invest in the solidarity fund.
No other details of Plan B were immediately available, but political leaders emerging from the meeting told reporters that a tax on bank deposits that sank an earlier deal had been ruled out completely.
CNA said the measure was likely to go before parliament on Thursday night after being considered by the cabinet.
With Cypriot banks in lockdown until next Tuesday, queues grew at cash dispensers on the island amid fears of an indefinite bank closure.
A European Union source said on Thursday that fears of a run on deposits when banks do reopen prompted the EU to urge Cyprus to place capital controls on the banks to avoid a financial collapse and an exit from the eurozone.
"Cypriot authorities have three things to do before Tuesday: Present a credible and viable plan B to replace the rescue rejected by parliament, install long-term controls on capital placed in the banks, and prepare to merge the two main banks in trouble," the senior European Union source said, adding that there was otherwise a risk of Cyprus having to leave the eurozone.
Orders have been placed to withdraw billions of euros as soon as business reopens on Tuesday, the source said.
The troika of lenders -- the EU, ECB and International Monetary Fund -- agreed to the 10-billion-euro bailout on Saturday on condition Cyprus raised the other 5.8 billion euros.
Lawmakers on Tuesday flatly rejected a highly unpopular measure that would have slapped a one-time levy of up to 9.9 percent on bank deposits as a condition for the loan, leaving the government scrambling to find other ways to raise cash to repay its debts.
Eurogroup head Jeroen Dijsselbloem warned in Brussels the crisis poses a "systemic risk" that threatens to ricochet through the eurozone.
In Moscow, Prime Minister Dmitry Medvedev slammed the European proposals to solve the Cyprus crisis as "absolutely absurd," further raising tension between Russia and the European Union.
Russians including wealthy tycoons hold between a third and half of all Cypriot deposits and are believed to have more than $30 billion in private and corporate cash in the island's banks.
Despite the large Russian holdings in Cyprus, the island's finance minister failed to make any progress in two days of Moscow talks to secure aid.
Sarris was to hold further meetings on Thursday although the prevailing mood offered little optimism and he stressed that a new loan from Russia was not on the table.
At the opening of a conference in Moscow with the head of the European Commission, Jose Manuel Barroso, Medvedev slammed the European strategy to bail out the near-bankrupt eurozone member.
"This scheme that is being discussed on Cyprus now looks absolutely absurd," Medvedev said.
"I think that in any case the Eurogroup could examine a future plan of regulating Cyprus with the participation of all the interested sides, including Russian structures."
Dijsselbloem said a fresh loan from Russia would be the wrong approach to take, as this would only pile up debt to an unsustainable level. The Cypriot banking model needs a total overhaul, he said.
Referring to "worries about the stability of the eurozone," Dijsselbloem said the "present situation (was) definitely a systemic risk -- the unrest of the last couple of days has proven this."