Queues form at cash machines in Cyprus as talks on EU bailout continue

Cyprus has until Monday to agree a revised bailout with the European Union or face financial collapse and possible exit from the euro.

The island nation’s banks are being kept afloat by emergency funding from the European Central Bank but that will cease early next week without a deal.

Banks in Cyprus have been shut all week, and are not due to reopen until Tuesday, to prevent a run on deposits.

The eurozone country initially agreed to impose a bank levy to qualify for a €10 billion bailout from the EU. Cypriots queued to empty cash machines at the weekend when they heard the news.

But that plan was rejected by Cypriot lawmakers Tuesday and officials have been scrambling since to come up with an alternative.

The European Central Bank said it would continue to provide liquidity until Monday but would only consider funding beyond then if Cyprus can resolve its differences with eurozone partners and the International Monetary Fund over how to fund a rescue.

“Thereafter, Emergency Liquidity Assistance could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks,” the ECB said in a statement.

Cyprus has been brought to its knees by the losses that its oversized banking sector sustained on investments in Greece.

Eurozone policymakers want it to find €5.8 billion as part of any rescue to ensure the country’s debt doesn’t soar to unsustainable levels. The total funding required to recapitalize the banks and meet government commitments is almost equal to annual gross domestic product.

Related: What next for Cyprus?

The proposed tax on all bank accounts, including deposits covered by the national guarantee scheme, outraged Cypriots and prompted widespread condemnation for undermining the principle that ordinary savers should not pay for bank failures.

But the EU is likely to insist that any revised deal includes a bank levy, perhaps limited only to accounts above the €100,000 limit on guaranteed deposits, because it does not want to be seen to be putting taxpayers money at risk to bail out wealthy Russians, who are estimated to account for about a third of all deposits in Cypriot banks.

“I still think it is probably inevitable there will be some kind of levy in the final package which we will agree upon,” said Dutch finance minister Jeroen Dijsselbloem, who chairs Eurogroup meetings of eurozone finance ministers.

“And I hope, as many members in the Eurogroup hope, that it will be a fair package in the way it addresses the burden sharing in a fair way,” he said in a speech to the European Parliament.

Marios Mavrides, a Cypriot lawmaker and member of President Nicos Anastasiades’ Democratic Rally party, told CNN a revised plan to raise Cyprus’ contribution could include nationalizing pensions of state and some private sector workers and the sale of state assets.

But a bank levy would still be required as part of the overall mix.

“We are going to eventually have to do it at a lower percentage,” he said.

Related: Why Russia is irate about the Cyprus bank tax

Russia may ease the pressure by agreeing to relax the terms of an existing €2.5 billion loan. Moscow has been angered by the plan to tax bank deposits but has larger business interests in Cyprus, which would suffer severe damage in the event of financial collapse.

Moody’s rating agency estimates that Russian banks have lent $30 to $40 billion to Cyprus-based companies of Russian origin, equivalent to up to 20% of the banks’ capital base.

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