Cyprus scrambles to avert meltdown, EU threatens cutoff

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By Michele Kambas and Matt Robinson

NICOSIA (Reuters) - Cyprus considered nationalizing pension funds and ordered banks to stay shut till next week to avert financial chaos after it rejected the terms of a European Union bailout and turned to Russia for aid.
Crisis talks among the political leadership in Nicosia are set to resume on Thursday after late-night meetings to discuss a "Plan B" broke up on Wednesday without result.
EU officials voiced frustration but little sympathy for an ambitious but now bust banking system that extended itself well beyond the island; Russia, whose citizens have billions to lose in those Cypriot banks, called the EU a "bull in a china shop".
President Nicos Anastasiades, just a month in office and wrestling with his country's worst crisis since the Turkish invasion of 1974 that divided Greek- and Turkish-speaking Cypriots, is due to meet party leaders at 9:30 a.m. (2.30 a.m. EST).
The deputy leader of his Democratic Rally warned time was running out: "We don't have days or weeks, we have only hours to save our country," Averos Neophytou told reporters.
Banks, shut since the weekend, are to stay closed for the rest of the week and so not reopen till Tuesday after a holiday weekend, a government official told Reuters, extending the misery of Cypriot businesses already feeling the pinch.
Without a resolution, the fate of the small nation of just 1.1 million has shaken confidence in the single-currency euro zone and raised geopolitical tension between the EU and Russia.
Finance Minister Michael Sarris extended a stay in Moscow, where Russian officials said he asked for a further 5 billion euros on top of a five-year extension and lower interest on an existing 2.5-billion euro loan from Moscow.
In a vote on Tuesday, the island's tiny legislature threw out a proposed tax on bank deposits in exchange for a 10-billion euro bailout from the EU, a stunning rejection of the kind of strict austerity accepted over the past three years by crisis-hit Greece, Portugal, Ireland, Spain and Italy.
Russian Prime Minister Dmitry Medvedev, who was preparing to meet an EU Commission delegation in Moscow on Thursday, said the bloc had behaved "like a bull in a china shop" and likened its proposals, which would force Russian customers to contribute to the rescue of Cypriot banks, to Soviet-era confiscations.
But the European Central Bank kept the pressure on, warning that it would have to pull the plug on Cyprus unless the country, one of the smallest of the 17 members of the euro zone, took a bailout quickly.
Despite the looming threat of default and a banking collapse, Cypriots on Tuesday balked at EU demands for a levy on bank deposits to raise 5.8 billion euros, once taboo in Europe's handling of the stubborn debt crisis.
LEVY STILL IN PLAY?
Anastasiades chaired meetings throughout Wednesday with party leaders, ministers and officials from the troika of EU, ECB and International Monetary Fund lenders. The government said a "Plan B" was in the works.
Officials said it could include: an option to nationalize pension funds of semi-government corporations, which hold between 2 billion and 3 billion euros; issuing an emergency bond linked to future natural gas revenues; and possibly reviving the levy on bank deposits, though at a lower level than originally planned and maybe excluding savers with less than 100,000 euros.
With Cypriot Energy Minister George Lakkotrypis also in Moscow, officially for a tourism exhibition, speculation was rife that access to untapped offshore gas reserves could be on the table as part of a deal for Russian aid.
Finance minister Sarris said talks with his Russian counterpart, Anton Siluanov, would continue, but there had not yet been any offers, "nothing concrete."
Cyprus is a haven for billions of euros squirreled abroad by Russian businesses and individuals - a factor, too, in the reluctance of Germany and other northern euro zone states to bail out Cypriots without a contribution from bank depositors.
The island's banking sector has been crippled by its exposure to bigger neighbor Greece. Athens said Greek branches of Cypriot banks would also stay shut till the weekend.
SLOWING TRADE
The proposed levy on deposits would have taken nearly 10 percent from accounts over 100,000 euros. Smaller accounts would also have been hit, although the government proposed softening the blow to spare savers with less than 20,000 euros.
Chancellor Angela Merkel, facing an election this year in Europe's main paymaster Germany, said it was fair to expect those with savings over 100,000 euros - the normal limit for EU state deposit insurance - to contribute to a bailout.
While taxing even small savers was politically explosive, the Cypriot government had balked at sparing them by imposing a higher tax on big depositors - fearing for an offshore banking business that accounts for a big share of its economy.
European officials were growing increasingly exasperated. But the idea of bankruptcy for a member of the euro zone, however small, raises fears for confidence in the currency.
"There is no obligation to accept help," said Polish Foreign Minister Radoslaw Sikorski, whose country does not use the euro. "Cyprus has the possibility of living with its own mistakes."