The European Union gave Cyprus till Monday to raise the billions of euros it needs to clinch an international bailout or face the collapse of its financial system and likely exit from the euro currency zone. In stark twin warnings on Thursday, the European Central Bank said it would cut off liquidity to Cypriot banks and a senior EU official made clear to Reuters that the bloc was ready to see the bankrupt island banished from the euro in the belief it could then contain damage to the wider European economy.
The ECB ultimatum came as the island's leaders struggled to craft a "Plan B" to raise the 5.8-billion euro contribution demanded by the EU in return for a 10-billion euro ($13-billion) bailout from the EU and International Monetary Fund; angry Cypriot 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.
In Brussels, a senior European Union official told Reuters that would mean Cyprus's biggest banks would be wound up, wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro. "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 said.
Cyprus's banking system, where massive Russian deposits give Moscow a distinct interest, has been brought close to collapse by its exposure to Greece, the epicentre of the euro zone 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's 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. Monday is a public holiday in Cyprus.
There were long queues at some bank branches in the capital 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-euro Russian loan. Russian citizens have billions of euros to lose in the island's outsized, teetering banking sector.
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