Cyprus seeks 11th-hour deal to avert meltdown

By Michele Kambas and Karolina Tagaris

NICOSIA | Sun Mar 24, 2013 5:14am EDT

(Reuters) - Cypriot President Nicos Anastasiades was expected in Brussels on Sunday to seek an 11th-hour reprieve from financial meltdown, with a bailout from the European Union and the island's place in Europe's single currency bloc hanging in the balance.

Underlining the gravity of Cyprus' position, the EU's economic affairs chief said there were now "only hard choices left" for the latest casualty of the euro zone crisis.

Facing a Monday deadline to avert a collapse of the Cypriot banking system, talks in Nicosia to seal a bailout from the EU and International Monetary Fund broke up late on Saturday without result.

"Negotiations are at a very delicate phase," the Cypriot government said in a statement.

"The situation is very difficult and the deadlines are very tight," it said. Anastasiades was due to arrive in Brussels in mid-morning to continue the talks, it said.

The tone of the statement differed sharply from earlier expressions of cautious optimism during days of intense negotiations between Cypriot leaders and officials from the island's "troika" of international lenders, the EU, IMF and European Central Bank.

Cyprus' overgrown banking sector has been crippled by exposure to crisis-hit Greece, and the EU says the east Mediterranean island must raise 5.8 billion euros ($7.5 billion) on its own before it can receive a 10 billion euro bailout.

Without a deal on Monday, the ECB says it will cut off emergency funds to Cypriot banks, spelling certain collapse and potentially pushing the country out of the euro zone.

Conservative leader Anastasiades, barely a month in the job and wrestling with Cyprus' worst crisis since a 1974 invasion by Turkish forces split the island in two, is expected to meet heads of the EU, the European Central Bank and IMF.

Finance Ministers of the 17-nation euro zone will meet at 1700 GMT Sunday.

Scrambling to find the funds, officials said Cyprus had conceded to a one-time levy on bank deposits over 100,000 euros, a dramatic U-turn from five days ago when lawmakers angrily threw out a similar proposal as "bank robbery."

A senior Cypriot official said Nicosia had agreed with its lenders on a 20 percent levy over and above 100,000 euros at the island's largest lender, Bank of Cyprus, and four percent on deposits above the same level at other banks.

'ONLY HARD CHOICES LEFT'

Finance Minister Michael Sarris spoke of "significant progress" in morning talks, as angry demonstrators outside the finance ministry chanted "resign, resign!"

The EU's Economic Affairs Commissioner, Olli Rehn, said progress was being made, but warned of tough times ahead.

"Unfortunately, the events of recent days have led to a situation where there are no longer any optimal solutions available," he said in a statement. "Today, there are only hard choices left."

In a stunning vote on Tuesday, Cyprus's 56-seat parliament rejected a levy on depositors, big and small, and Sarris spent three fruitless days in Moscow trying to win help from Russia, whose citizens have billions of euros at stake in Cypriot banks.

Rebuffed by the Kremlin, Sarris said the levy was back "on the table".

On Friday, lawmakers voted in late-night session to nationalize pension funds and split failing lenders into good and bad banks - a measure likely to be applied to No.2 lender Cyprus Popular Bank, also known as Laiki.

Cypriot media reports suggested talks were stuck on a demand by the IMF that Bank of Cyprus absorb the good assets of competitor Popular Bank and take on its nine billion euro debt to the central bank as well.

The reports said the Cypriot government was resisting.

A Cypriot plan to tap pension funds had already been shelved, a senior Cypriot official told Reuters, under opposition from Germany, which had warned the measure might be even more painful for ordinary Cypriots than a deposit levy.

It was also far from certain that a majority of lawmakers would back a revised levy, or whether the government might even try to bypass the assembly.

Ordinary Cypriots have been outraged by the levy and stunned at the pace of the unfolding drama. They elected Anastasiades in February on a mandate to secure a bailout and save banks whose capital was wiped out by investments in Greece, the epicenter of the euro zone debt crisis.

RUN ON BANKS

But for the past week they have been besieging cash machines ever since bank doors were closed on the orders of the government to avert a massive capital flight. Anticipating a run on banks when they reopen on Tuesday, parliament has given the government powers to impose capital controls.

On Saturday, some 1,500 protesters, many of them bank workers, marched on the presidency, holding banners that read, "No to the bankruptcy of Cyprus" and "Hands of workers' welfare funds".

The levy on bank deposits represents an unprecedented step in Europe's handling of a debt crisis that has spread from Greece, to Ireland, Portugal, Spain and Italy.

Cypriot leaders had initially tried to spread the pain between big holdings and smaller depositors, fearing the damage it would inflict on the country as an offshore financial haven for wealthy foreigners, many of them Russians and Britons.

The tottering banks hold 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros - enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own.

"Cypriot banks have for years been taking the kinds of risks that are not allowed in France," Bank of France governor Christian Noyer told the French newspaper Le Journal du Dimanche. "Nobody wants Cyprus to leave the euro," he said. "The first people to suffer would be Cypriot citizens."

(Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Costas Pitas and Laura Noonan in Nicosia; Writing by Matt Robinson; Editing by Giles Elgood)