Panicos Demetriades, the central bank governor, said Parliament would be asked to split Laiki, the island’s second lender, into a “good” and “bad” bank, with larger deposits folded into the latter.
Deposits up to €100,000 would be guaranteed and bank jobs would be safeguarded, he added.
“By establishing this legal framework, resolution measures will be imposed on Popular Bank [Laiki] so that it will be in a position to continue to offer banking services to its clients.”
Parliament was scheduled to reconvene on Friday (22 March) to debate a raft of government crisis measures after lawmakers adjourned yesterday's sitting saying they needed more time for consultation to decide on a 61-page bill to overhaul the banking system.
Trying to placate its lenders, the government proposed to parliament a "solidarity fund" that would bundle state assets, including future gas revenues, as the basis for an emergency bond issue, likened by JP Morgan to "a national fire sale".
It also sought the power to impose capital controls on banks, a type of measure unseen since before the country joined the single currency bloc five years ago.
Cyprus, which joined the euro in January 2008, has been trying to find €5.8 billion required to unlock a €10 billion EU bailout.
More than two-thirds of the ECB’s 23-strong governing council backed the deadline, which would cut off €9bn in emergency liquidity assistance from the Central Bank of Cyprus that has been used to fund the island’s two biggest banks, Bank of Cyprus and Laiki.
The EU was ready to see the island banished from the euro to contain damage to the wider European economy, a senior EU official said.
"If the financial sector collapses, then they simply have to face a very significant devaluation, and faced with that situation, they would have no other way but to start having their own currency," the EU official told Reuters.
Angry Cypriot lawmakers earlier this week threw out a tax on deposits, calling the EU-backed proposal "bank robbery".
The country’s banks have been closed all week. Long queues formed at cash machines across Nicosia, as Laiki bank imposed a €260 limit on withdrawals.
After more talks yesterday, the eurozone finance ministers, who backed the controversial measure to tax deposits under €100,000, urged Cyprus to table a new proposal.
Russian money or bust
Under the levy rejected by parliament, EU lenders, notably Germany, had wanted uninsured bank depositors to bear some of the cost of recapitalising the banks, but Cyprus feared for its future reputation as an offshore banking haven and planned to spread the burden also to small savers whose deposits under €100,000 were covered by state insurance. Lawmakers threw it out.
In Moscow since Tuesday, Cypriot Finance Minister Michael Sarris said he was discussing possible Russian investments in banks and energy resources, as well as an extension of an existing €2.5 billion Russian loan.
He said Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry said on Monday that Nicosia sought an extra €5-billion loan.
The chairman of the euro group of finance ministers, Dutchman Joreon Dijsselbloem, told the European Parliament that Moscow informed the EU it had no intention of putting more money into Cyprus.