'Haircut' option back as Cyprus fends off bankruptcy

Cyprus was revisiting the option of a tax on bank deposits during "hard negotiations" Friday with a troika of lenders, as it raced to secure a bailout to stave off bankruptcy and a possible eurozone exit.

The European Union has given Nicosia until Monday to raise 5.8 billion euros ($7.47 billion) to unlock loans worth 10 billion euros or face being choked from European Central Bank emergency funds in a move that would collapse its economy.

EU sources have said the bloc is ready to eject Cyprus from the eurozone to prevent contagion of other debt-hit members such as Greece, Spain and Italy.

With Russia Friday spurning investment proposals that would have helped rescue the Cyprus economy, the authorities were looking again at the option of slapping a one-time levy on bank deposits, government sources told the Cyprus News Agency.

Government spokesman Christos Stylianides said Nicosia was locked in "hard negotiations with the troika (the EU, ECB and International Monetary Fund) in order to conclude solutions that will save the banking system, the economy in general and will bring back calmness in the country."

"The next few hours will determine the future of this country. We must all assume our responsibility," Stylianides said, as the government sought to head down a growing sense of anger and panic among Cypriots fearful that their life savings will disappear in the rubble of a banking collapse.

The "haircut" proposal was abruptly knocked back by MPs when they debated the bailout deal on Tuesday, in a resounding "no" vote that jolted global markets and raised fears of a debt contagion in the eurozone.

The Bank of Cyprus and Popular Bank, the island's two largest banks which are both in danger of collapse, however Friday came out strongly in favour of a tax on bank deposits above 100,000 euros, saying this was the only way the banking sector could be saved.

Some among a crowd of 200 protesters outside the legislature on Friday, mostly employees of Laiki, or Cyprus Popular Bank, who face losing their jobs, also urged MPs to reverse their opposition to a tax on deposits.

"The right thing to do was to accept the haircut the way it was suggested then. Was there a possibility for the Eurogroup to accept anything else? They studied it and said that we should do it," said bank employee Andreas Chrysafis.

A group of protesters sat down in the street, blocking access to the complex, after anger boiled over and scuffles with police broke out briefly late on Thursday.

Friday's protest came ahead of an expected meeting of the legislature to debate a raft of eight bills to give effect to the government's reworked rescue plan -- the so-called Plan B.

One bill sets up an investment fund and the nationalisation of pension funds, with bonds issued against future natural gas revenues, while another prevents large outflows of capital from the country, expected when banks reopen on Tuesday.

Government hopes of an economic lifeline from Russia proved to be illusory, and Finance Minister Michalis Sarris left Moscow on Friday after two days of talks without reaching an agreement.

Russian officials said two major state-owned energy firms had turned down deals put forward by Sarris and that Russia refused a loan request to fill the 5.8-billion-euro shortfall left by the EU-IMF bailout offer.

"Our investors examined this issue and showed no interest," Russian news agencies quoted Finance Minister Anton Siluanov as saying.

He added that Moscow never reviewed the issue of providing a new loan fearing that Cyprus, already on the brink of bankruptcy, could not withstand more debt.

Russian Prime Minister Dmitry Medvedev said later that Moscow "has not closed the door" on possible future assistance.

"But this will only come after there is a final plan of support for Cyprus from the European countries," he said after talks with European Commission president Jose Manuel Barroso.

News of the Russian rejection did little to brighten the mood of people in long queues at bank cash-dispensing machines.

Banks have been in lockdown this entire week and are not due to reopen at least until Tuesday.

The chairman of the Eurogroup of finance ministers, Jeroen Dijsselbloem, said currency partners were willing to work with Nicosia on its new plans.

But German Chancellor Angela Merkel warned that the patience of Cyprus's European partners on efforts to secure the bailout has its limits, lawmakers of her coalition parties said.

German Finance Minister Wolfgang Schaeuble was quoted by the mass-circulation Bild daily as saying he was sceptical about Plan B.

"Cosmetic changes alone are not enough," the newspaper quoted Schaeuble as saying, citing government coalition members who met him late on Thursday.