Cyprus seeks Russian rescue, EU threatens cutoff

By Michele Kambas and Lidia Kelly

NICOSIA/MOSCOW | Wed Mar 20, 2013 8:58am EDT

(Reuters) - Cyprus pleaded for a new loan from Russia on Wednesday to avert a financial meltdown, after the island's parliament rejected the terms of a bailout from the EU, raising the risk of default and a bank crash.

Cypriot Finance Minister Michael Sarris said he had not reached a deal at a first meeting with his Russian counterpart Anton Siluanov in Moscow, but talks there would continue.

Russia's finance ministry said Nicosia had sought a further 5 billion euros, on top of a five-year extension and lower interest on an existing 2.5 billion euro loan.

Cyprus is seeking Moscow's help after parliament voted down the euro zone's plan for a 10 billion euro bailout on Tuesday.

Cypriots balked at EU demands for a levy on bank deposits to raise 5.8 billion euros, an unprecedented measure that opponents said would have violated the principle behind an EU-wide guarantee on deposits of up to 100,000 euros.

Moscow has its own interests in ensuring the survival of banks in Cyprus, a haven for billions of euros squirreled abroad by Russian businesses and individuals.

The European Central Bank's chief negotiator on Cyprus, Joerg 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 program is not agreed on soon, which would allow for a quick recapitalization of the banking sector," Asmussen told German weekly Die Zeit in an interview conducted on Tuesday evening.

Austrian Chancellor Werner Faymann said he could not rule out Cyprus leaving the euro zone, although he hoped its leaders would find a solution for it to stay.

Cyprus Energy Minister George Lakkotrypis was also in Moscow, officially for a tourism exhibition, but fuelling talk that access to untapped offshore gas reserves could be on the table as part of a deal for Russian aid. Cyprus has found big gas fields in its waters adjoining Israel.

"We had a very honest discussion, we've underscored how difficult the situation is," Sarris told reporters after talks with Siluanov. "We'll now continue our discussion to find the solution by which we hope we will be getting some support.

"There were no offers, nothing concrete," he said.

Speculation was rife over the shape that Russian help might take. Government spokesman Christos Stylianides denied a Greek media report that Cyprus had reached a deal for Russian investors to buy Cyprus's second largest bank, Cyprus Popular, which was taken over by the state last year.

Not a single Cypriot lawmaker voted for the EU bailout, which included a proposed levy that would have taken nearly 10 percent from accounts over 100,000 euros. Smaller accounts would also have been hit, although the government proposed softening the blow to spare savers with less than 20,000 euros.

It was the first time a national legislature had rejected the conditions for EU assistance, after three years in which lawmakers in Greece, Ireland, Portugal, Spain and Italy all accepted biting austerity measures to secure aid.

German Chancellor Angela Merkel, whose country is Europe's main paymaster, said it was up to the Cypriot government to come up with an alternative proposal but it was fair to expect savers with deposits over 100,000 euros to contribute to the bailout.

The EU has a track record of pressing smaller countries to vote again until they achieve the desired outcome.

"PLAN B"

Nicosia was eerily quiet on Wednesday, the morning after demonstrators cheered parliament's rejection of what was seen as an unfair EU diktat.

The government has not allowed banks to reopen this week to prevent a run, but cash machines which were emptied over the weekend have been replenished, giving people access to limited amounts of cash.

"Things won't be so bad as long as people can withdraw from ATMs but if they go too there will be a huge problem," said Titos Pitsillides, 50.

Among the most urgent decisions awaited was whether the government will allow banks to reopen as planned on Thursday, or keep them closed until next week. Deputy Central Bank governor Spyros Stavrinakis said no decision had been taken yet.

A Cypriot official who asked not to be identified said the government was considering whether to impose capital controls when the banks reopen.

President Nicos Anastasiades, barely a month in the job, met party leaders and the governor of the central bank at his office. Government spokesman Christos Stylianides said a "Plan B" was in the works.

"A team of technocrats has gone to the central bank to discuss a plan B related to financing and reducing the 5.8 billion euro amount," he told reporters during a break in the meeting with party leaders. He did not elaborate.

Anastasiades later met officials from the "troika" of the EU, European Central Bank and International Monetary Fund.

Lawmaker Marios Mavrides told Reuters one option under discussion was to nationalize pensions funds of semi-government corporations, which hold between 2 billion and 3 billion euros.

An opposition politician present at Wednesday's crisis talks said: "The idea is we can get the pension funds of organizations like the Cyprus Telecoms Organisation and the Electricity Authority, maybe some others as well, and raise two to three billion euros. If we raise half of the money then maybe we could top up to the 5.8 billion euro amount by passing the Cypriot banks into Russian hands."

The crisis is unprecedented in the history of the divided east Mediterranean island of 1.1 million people, which suffered a war with Turkey and ethnic split in 1974 in which a quarter of its population was displaced. The Turkish-populated north considers itself a separate country, recognized only by Turkey.

While Brussels has emphasized that the tax measure was a one-off for a country that accounts for just 0.2 percent of Europe's output, fears have grown that savers in other, larger European countries might be spurred to withdraw funds.

GAS DEPOSITS

Leaders of the currency union said the bailout offer still stood, provided the conditions were met. Teetering Cypriot banks have been crippled by their exposure to the financial crisis in neighboring Greece, where the euro zone debt crisis began.

Germany, facing an election this year and increasingly frustrated with the mounting cost of bailing out its southern partners, said Cyprus had no one to blame but itself.

With Sarris Lakkotrypis in Moscow, there was mounting speculation that Russian oil and gas giant Gazprom had mooted its own assistance plan in exchange for exploration rights to Cyprus's offshore gas deposits.

"We at Gazprom did not offer Cyprus anything," Gazprom's spokesman, Sergei Kupriyanov, said.

Noble Energy reported a natural gas recovery of 5 to 8 trillion cubic feet of gas south of Cyprus in late 2011, in the island's first foray to tap offshore resources.

A senior source in the "troika" said dealing with Cyprus was even more frustrating than protracted wrangling with Greece.

"The Greeks wanted to cheat on you all the time, but they knew what they wanted. The Cypriots are leaving us really confused," the source said. ($1 = 0.7760 euros)

(Additional reporting by Karolina Tagaris and Matt Robinson in Nicosia, Maya Dyakina in Moscow, Annnika Breidthardt in Berlin, Sakari Suoinen and Eva Kuehnen in Frankfurt and Georgina Prodhan in Vienna; Writing by Matt Robinson and Paul Taylor; Editing by Peter Graff)