The European Central Bank has given Cyprus until Monday (25 March) to raise billions of euros to clinch an international bailout or face losing emergency funds for its banks and inevitable collapse.
The ultimatum came as the island's leaders struggled over a "Plan B" to try to raise €5.8 billion demanded by the EU under a €10 billion rescue, after angry lawmakers threw out a tax on deposits as "bank robbery".
The government said party leaders had agreed to create a "solidarity fund" that would bundle state assets as the basis for an emergency bond issue, but parliament speaker Yiannakis Omirou insisted a revised levy on larger bank deposits, many of them held by Russians, was not on the table.
The European Central Bank, which has kept Cyprus's banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off.
"Thereafter, Emergency Liquidity Assistance [ELA] could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks," it said.
Cyprus' banking system has been brought close to collapse by its exposure to Greece, the epicentre of the eurozone debt crisis. But until this week, the expectation in Brussels and on financial markets had been that the appointment of a new Cypriot government in February would smooth the path to a bailout deal.
Cyprus' central bank governor said he expected to clinch a financial support package by Monday. He did not say how.
The government has ordered banks to stay closed until Tuesday. The stock exchange also suspended trading for the rest of the week.
There were long queues at some bank branches in Nicosia as staff replenished cash machines, which have continued to operate while banks have been closed since last week.
In Moscow, Cypriot Finance Minister Michael Sarris said he was discussing possible Russian investments in the island's banks and energy resources to reduce its debt burden, as well as an extension of an existing €2.5-billion Russian loan.
Russian citizens have billions of euros to lose in the island's outsized, teetering banking sector.
"The banks are the ultimate objective in any support we get, so it'll either be a direct support to the banks or the support that we get through other sectors will be channelled to the banks," Sarris told Reuters during a second day of talks with his Russian counterpart, Anton Siluanov.
He said Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry had said on Monday that Nicosia sought an extra 5-billion-euro loan.
Dijsselbloem: No more money
The chairman of eurozone finance ministers, Dutchman Jeroen Dijsselbloem, told the European Parliament that Moscow had informed the EU it had no intention of ploughing more money into Cyprus beyond the existing loan.
"Any other options, to go further, another loan or an investment in the banks, the Russians let us know that they are not willing to do that," he said. "Of course, the Cypriot government is now talking to the Russian government whether more can be done, I don't know the outcome of that yet."
Dijsselbloem said new loans from Russia would anyway not solve the debt issue, and that a revised levy on larger bank deposits was still a possibility.
"I'm not sure that this package is completely gone and failed, because I don't see many alternatives," he told the European Parliament in Brussels.
Senior eurozone officials acknowledged in a confidential conference call on Wednesday that they were "in a mess" and discussed imposing capital controls to insulate the currency area from a possible collapse of the Cypriot economy.
Cyprus refused to take part in the call, minutes of which were seen by Reuters. Several participants described its absence as troubling and reflecting the wider confusion surrounding the island's predicament.
EU officials believe at least some of the €5.8 billion they are demanding should come from the €68 billion in Cypriot banks, €38 billion of which are in the form of large deposits of more than €100,000, mainly from foreigners.
But hitting small savers caused visceral outrage, and the Cypriot government fears that foisting too big a burden on large depositors would wreck the offshore financial industry that forms much of the country's economy.
Among the other options, nationalising pension funds of semi-public companies could yield between €2 billion and €3 billion, although European officials say it would raise less. Issuing bonds linked to future natural gas revenue is problematic because pumping any gas is years away.
‘Like a bull in a china shop’
Doubts about the fate of the small nation of just 1.1 million people has shaken confidence in the single-currency eurozone and raised geopolitical tension between the EU and Russia.
Russian Prime Minister Dmitry Medvedev, who meets a European Commission delegation in Moscow on Thursday, said the bloc had behaved "like a bull in a china shop". He likened EU proposals, which would force Russian customers to contribute to the rescue of Cypriot banks, to Soviet-era expropriations.
Tuesday's parliamentary vote marked a stunning rejection of the kind of strict austerity accepted over the past three years by crisis-hit Greece, Portugal, Ireland, Spain and Italy.
European officials maintained the pressure on Nicosia.
"I cannot rule out a Cyprus insolvency," Austrian Finance Minister Maria Fekter said in an interview with the newspaper Österreich. "A euro exit would not achieve anything. Cyprus must act now."
Cyprus is a haven for billions of euros squirreled abroad by Russian businesses and individuals – one of the reasons why Germany and other northern eurozone states are reluctant to bail it out without a contribution from bank depositors.
The island's banking sector was hollowed out by its exposure to bigger neighbour Greece.
The entire island of Cyprus is officially EU territory, but the country is divided. Turkey, an EU candidate, doesn’t recognise the Republic of Cyprus and has occupied the northern part of the island since 1974.
Cyprus is heavily exposed to the Greek crisis and needs to salvage its banking system, which in recent years has become a haven for rich Russians.
Eight months of inconclusive talks on a bailout package have turned tiny Cyprus into a big headache for the eurozone, triggering fears of a financial collapse that reignites the bloc's debt crisis.
Nicos Anastasiades, who won a resounding victory in the February elections, promised to “restore the credibility of Cyprus”.