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President Nicos Anastasiades, faced with a default of the Cyprus banking system if urgent needed funds are not released to rescue the eurozone member, is starting emergency talks in Brussels on Sunday with EU President Herman Van Rompuy, prior to a Eurogroup finance ministers' meeting at 6pm local time (1700 GMT).
The EU leader cancelled an official visit to Japan and will try to conclude a deal together with Commission chief Jose Manuel Barroso, while ECB president Mario Draghi and IMF boss Christine Lagarde will also be there, to iron out differences that have delayed a 10 bln euro bailout. They have also insisted that Cyprus finds a further 5.8 bln from own funds and not seek "external aid," suggesting Russia.
Late night talks in Cyprus were inconclusive with the Troika representatives of international lenders, who want second largest Popular Laiki bank "resolved", now demanding that largest lender Bank of Cyprus accept a 22-25% levy on all its large savings in the form of a "bail in" in return for equity, an option that has upset Russian depositors whom German finance minister Wolfgang Schauble insist calling oligarchs and money launderers.
Analyst suggest this "punishment" is exaggerated as total Russian deposits on the island do not exceed 20-25 bln euros, most of wich in Russian-owned banks that have probably already been siphoned out with the Kremlin's approval.
Underlining the gravity of Cyprus' position, EU economic affairs Commissioner Olli Rehn said there were now "only hard choices left" for the latest casualty of the euro zone crisis.
The Cyprus banking sector, estimated at seven times its GDP, compared to 3.5 times for the Eurozone average, has been crippled by exposure to crisis-hit Greece, and the ECB said it will cut off emergency funds to Cypriot banks, spelling certain collapse and potentially pushing the country out of the euro zone.
A senior politician, Prodhromos Prodhromou of the ruling Democratic Rally, said president Anastasiades has nothing else to offer in negotiations. "We have given everything there is to give. He will now have to beg for mercy."
ONLY HARD CHOICES
Finance Minister Michael Sarris spoke of "significant progress" in talks on Saturday, as angry demonstrators outside the finance ministry, mostly Laiki Bank employees, chanted "resign, resign!" Central Bank Governor Panicos Demetriades has also been called to resign, primarily by the communist Akel party that chose him for the job last May.
"Unfortunately, the events of recent days have led to a situation where there are no longer any optimal solutions available," the EU's Olli Rehn said on Saturday. "Today, there are only hard choices left."
On Friday, parliament voted in a late-night session to nationalise pension funds and split failing lenders into good and bad banks.
Local media reports suggested talks were stuck on a demand by the IMF that Bank of Cyprus absorb the good assets of Popular Bank and take on its 9 bln euros debt to the central bank as well. Both banks agreed on Friday to pass on their Greek brranch operations and assets to Piraeus Bank, that would also reduce their debt at home.
For the past week people 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. Parliament also agreed to a 260 euro cap on all withdrawals from ATM cash machines.
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.
