Cyprus turns to Brussels for help on bailouot

After week of flailing, Cyprus turns to Brussels for last-ditch help with bailout deal

Associated Press
Cyprus sends rumbles through shaky banking system
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The Cypriot, left, and EU flag are seen at the Cypriot delegation building in Brussels on Sunday, March 24, 2013. The EU says a top official will chair a high-level meeting on Cyprus in a last-ditch effort to seal a deal before finance ministers decide whether the island nation gets a 10 billion euro bailout loan to save it from bankruptcy. (AP Photo/Virginia Mayo)

BRUSSELS (AP) -- After failing for a week to find a solution at home to a crisis that could force it into bankruptcy, Cypriot politicians were turning to the European Union on Sunday in a last-ditch effort to help the island nation forge a viable plan to secure an international bailout.

Politicians are under pressure to come up with a solution quickly, with the European Central Bank threatening to stop providing emergency funding to Cyprus' banks after Monday if there is no agreement on a way to raise 5.8 billion euros ($7.5 billion) needed to get a 10 billion euro rescue loan package from the other European countries that use the single currency and the International Monetary Fund.

If Cyprus fails to secure a bailout, some of its ailing banks could collapse within days and rapidly drag down the government and possibly force it out of the euro, a huge threat to the stability of the currency used by more than 300 million people in 17 EU nations.

Despite the danger, Europe's biggest economy maintained a hard line. German Finance Minister Wolfgang Schaeuble said that "if possible we want to avoid seeing Cyprus sliding into insolvency."

But, he added in an interview with the German newspaper Welt am Sonntag published Sunday that Cyprus cannot expect compromise over the threat of bankruptcy and possibility it could leave the eurozone.

"I'm also known for not giving in to blackmail, by nobody and nothing," he said.

The original plan, agreed to in marathon negotiations earlier last week, called for a one-time levy on all bank depositors in Cypriot banks. But the proposal ignited fierce anger among Cypriots and failed to garner a single vote in the Cypriot Parliament.

The idea of some sort of deposit grab has returned to the fore after Cyprus' attempt to gain Russian financial aid failed this week, with deposits above 100,000 euros at the country's troubled largest lender, Bank of Cyprus, possibly facing a levy of up to 25 percent.

Cypriot President Nicos Anastasiades and his finance minister traveled to Brussels for meetings with European Union leaders.

European Council President Herman Van Rompuy was chairing a meeting, but a spokesman insisted his role was not to force a deal but to encourage discussion.

To avoid bankruptcy or the collapse of its banking system, Cyprus needs significantly more than the 10 billion euros the international creditors are willing to lend it. They fear that more loans would balloon the country's debt level to an unsustainable level. For that reason, the country must somehow raise the additional money.

Cyprus has "to fulfill a difficult mission to save the Cypriot economy and avert a disorderly default threatening the economy if there is no final deal for the loan agreement," government spokesman Christos Sylianides said in a written statement Sunday.

Officials fear that a Cypriot bankruptcy, which would likely force the country to become the first eurozone member to leave the currency bloc, would roil markets and result in uncertainty that could engulf other weaker eurozone nations, leader to capital flight and higher government borrowing costs.

Anastasiades was also set to meet IMF Chief Christine Lagarde and ECB President Mario Draghi.

If the Cypriots agree to a plan on Sunday, the IMF, European Central Bank and European Commission will then determine whether it meets the requirement that Cyprus' debt, including any new bailout loan, be sustainable over the long run.

Any new proposal would then have to be approved Sunday evening by the Eurogroup, the gathering of finance ministers from the 17 EU countries that use the euro currency.

Their decision might come only as a broad political agreement, with technical details to be hammered out in the coming days. But without an agreement in principle, the ECB is likely to pull the plug on the country's banking system.

Cyprus already took significant steps toward cementing a new plan Friday night, when lawmakers voted to restructure ailing banks, restrict financial transactions in emergencies and set up a "solidarity fund" that should act as the vehicle for raising funds from investments and contributions.

The bank restructuring will include the country's second largest lender, Laiki, which suffered heavy losses after being exposed to toxic Greek debt. The restructuring and the sale of Greek branches of Cypriot banks are expected to significantly lower the 5.8 billion euros that the country needs to raise on its own to secure the rescue loan package.

Cypriot banks have been shut this past week while the plan was being worked out, and are not due to reopen until Tuesday. Cash has been available through ATMs, but many run out quickly.

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Associated Press writer Elena Becatoros in Nicosia, Cyprus, contributed to this story.

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Don Melvin can be reached at https://twitter.com/Don_Melvin

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