Cyprus weighs big bank levy; bailout goes down to wire

By Karolina Tagaris and Michele Kambas

NICOSIA (Reuters) - Cyprus conceded on Saturday to a one-off levy on deposits over 100,000 euros in a dramatic U-turn as it raced to satisfy European partners and seal an 11th-hour bailout deal to avert financial collapse.

The island's finance minister, Michael Sarris, reported "significant progress" in talks with international lenders, with the clock running down to end-Monday deadline for Cyprus to clinch a bailout deal with the EU or lose emergency funding for its stricken banks and risk tumbling out of the euro zone.

His counterparts in Europe's 17-nation currency union scheduled talks in Brussels for Sunday evening to see if the numbers add up, and the EU's Economic Affairs Commissioner Olli Rehn said progress was being made towards a solution.

As Cypriot party leaders met, a senior Cypriot official told Reuters that Nicosia had agreed with EU/IMF lenders on a 20 percent levy over and above 100,000 euros at No. 1 lender Bank of Cyprus, and four percent on deposits over the same level at others.

Troika officials could not immediately be reached for comment.

Cypriot President Nicos Anastasiades tweeted: "We are undertaking great efforts. I hope we have a solution soon."

The conservative leader, barely a month in the job and wrestling with Cyprus's worst crisis since a 1974 invasion by Turkish forces split the island in two, was due to lead a delegation to Brussels, also on Sunday, to meet heads of the EU, the European Central Bankand International Monetary Fund, in a sign a deal might be near.

"Hopefully by tomorrow in Brussels we will have the agreement of our partners," Averof Neophytou, deputy leader of the ruling Democratic Rally party, told reporters.

Government officials held talks through the day at the finance ministry with Cyprus's 'troika' of lenders - the EU, ECB and IMF. Angry demonstrators outside chanted "resign, resign!"

Its outsized banking sector crippled by exposure to crisis-hit Greece, Cyprus needs to raise 5.8 billion euros in exchange for a 10 billion euro EU lifeline to keep the country's economy afloat.

But in a stunning vote on Tuesday, Cyprus's 56-seat parliament rejected a levy on depositors, big and small, as "bank robbery", and Sarris spent three fruitless days in Moscow trying to win help from Russia, whose citizens have billions of euros at stake in Cypriot banks.

Rebuffed by the Kremlin, Sarris said on Saturday talks with the troika were centered on a possibly levy of around 25 percent on savings over and above 100,000 euros at failing Bank of Cyprus.

In a sign of how fluid the situation remains, however, a senior ruling party lawmaker said other options were on the table, including a "voluntary haircut" in exchange for equity that would not require parliamentary approval.

The EU's Rehn said the bloc recognized the progress made by the Cypriot government, and warned of tough times ahead.

"Unfortunately, the events of recent days have led to a situation where there are no longer any optimal solutions available," he said in a statement. "Today, there are only hard choices left."

It was far from certain that a majority of lawmakers would back a revised levy, or whether the government might bypass the assembly.

Ordinary Cypriots were outraged by the original proposal, and have been besieging cash machines ever since bank doors were closed last weekend on the orders of the government to avert a massive flight of capital.

RESISTANCE

Racing to placate its European partners, Cypriot lawmakers voted in late-night session on Friday to nationalize state pensions and split failing lenders into good and bad banks - a measure likely to be applied to No.2 lender Cyprus Popular Bank, also known as Laiki.

They also gave the government powers to impose capital controls, anticipating a run on banks when they reopen on Tuesday.

A plan to nationalize semi-state pension funds has met with resistance, particularly from Germany which made clear that tapping pensions could be even more painful for ordinary Cypriots than a deposit levy.

The senior official who told Reuters of the levy agreement said the pension funds would not be part of the package to seal the bailout.

The bank restructuring has also angered Cypriots. On Saturday, around 1,500 bank workers marched on the presidency, holding banners that read, "No to the bankruptcy of Cyprus" and "Hands of workers' welfare funds".

OFFSHORE HAVEN

The pace of the unfolding drama has stunned Cypriots, who in February elected Anastasiades on a mandate to secure a bailout and save banks whose capital was wiped out by investments in Greece, the epicenter of the euro zone debt crisis.

Then news of the levy on bank deposits broke, an unprecedented step in Europe's handling of a debt crisis that has spread from Greece, to Ireland, Portugal, Spain and Italy.

Cypriots leaders had initially tried to spread the pain between big holdings and smaller depositors, fearing the damage it would inflict on the country as an offshore financial haven for wealthy foreigners, many of them Russians and Britons.

The tottering banks hold 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros - enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own.

But panicked by the visceral reaction of ordinary Cypriots, support from lawmakers fell away and they rejected the levy as "bank robbery".

Asked about the new plan for a possible 25 percent levy, Finnish Prime Minister Jyrki Katainen, whose country is allied with Germany in taking a hard line on Europe's debt-laden southern flank, replied in English:

"If it was like this, I think it might be quite suitable because it means that the highest deposits will be taxed."

Cyprus fears this will drive wealthy depositors away, but the likes of Germany and France say Cyprus's offshore-haven business model was never sustainable.

"Cypriot banks have for years been taking the kinds of risks that are not allowed in France," Bank of France governor Christian Noyer told the French newspaper Le Journal Du Dimanche.

"Nobody wants Cyprus to leave the euro," he said. "The first people to suffer would be Cypriot citizens."

(Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Costas Pitas and Laura Noonan in Nicosia Writing by Matt Robinson; Editing by Mike Peacock)

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