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Cypriot officials: Plan B drawn up to get bailout

Thursday - 3/21/2013, 4:14am  ET

Delia Velculescu, head of Troika (IMF), leaves the presidential palace after meeting with Cyprus' President Nicos Anastasiades, not pictured, in the capital Nicosia, Wednesday, March 20, 2013. Cypriot lawmakers on Tuesday rejected a critical draft bill that would have seized part of people's bank deposits in order to qualify for a vital international bailout, with not a single vote in favor. (AP Photo/Petros Karadjias)

MENELAOS HADJICOSTIS
Associated Press

NICOSIA, Cyprus (AP) -- Searching for a way out of a crippling financial crisis, officials in Cyprus on Wednesday pursued a new bailout strategy that could include a loan from Russia in exchange for natural gas leases and selling off assets from its most troubled banks.

Cyprus needs to come up with 5.8 billion euros ( $7.5 billion) on its own in order to secure 10 billion euros in rescue loans from international creditors. But the country's first plan to seize up to 10 percent of people's bank accounts failed miserably. Now officials are trying to limit the amount of money they need to take from customer's deposits.

The new "Plan B" could be voted on as early as Thursday, three top government officials said.

The latest move came a day after lawmakers voted overwhelmingly against the earlier plan -- a rejection that threw Cyprus' entire bailout into question. That raised the possibility the country's banks could collapse, the government would be unable to pay its bills and Cyprus could be forced out of the euro.

That could roil global financial markets as well as endanger deposits in the country even further.

The new "Plan B" was described by three top government officials, who spoke on condition of anonymity because details of the proposal were not being released until party officials had a chance to review them at a meeting Thursday morning.

The package includes a proposal to restructure Cyprus' heavily indebted second-largest lender, Laiki. The idea would be to isolate the bank's bad assets, which would be taken over by the government, from its good assets, which could be sold off to raise money. That strategy could also be applied to the country's biggest lender, Bank of Cyprus.

To avoid bank runs and give officials time to push the package through, the country's banks, which have been shuttered since Saturday, will remain closed for the rest of the week, said the central bank spokeswoman, Aliki Stylianou. Monday is a bank holiday, so banks will not reopen before Tuesday.

Cyprus has turned to long-time ally Russia for help, and Finance Minister Michalis Sarris was in Moscow on Wednesday to discuss a range of aid options and vowed to remain there until he secured a pledge of support. "We will be here until some kind of agreement is reached," Sarris said.

Nearly a third of the total amount of deposits in Cyprus' banks is believed to be held by Russians. The idea that authorities could dip directly into people's bank accounts had outraged Cypriots and Russians alike.

A Cypriot government official said the new proposal still includes some tax on deposits, but at a percentage far lower than those originally proposed. The official said the EU had given Cyprus until Monday to come up with an alternative, so speed was of the essence.

The European Union and Germany in particular, have long argued that they should not have to ask their own taxpayers to contribute to bailing out a country when it was Russian oligarchs who would benefit.

While the economy of Cyprus is tiny -- a mere 0.2 percent of the eurozone -- its exit from the shared currency could raise speculation that other, larger countries could leave, roiling global financial markets.

Cypriot political leaders held emergency meetings throughout the day Wednesday to try to find an alternative plan and seemed inclined to rely on Russia to help them out.

Russia is a longtime ally and also has skin in the game -- Russians own about a third of the 68 billion euros in deposits with Cypriot banks. It was unclear however, how much it would help and the Russians appeared to be balking at pouring any more money into the country.

Russia could extend a 2.5 billion euro loan that it gave Cyprus in 2011 and lower repayment rates. It could also provide a fresh loan, have one of its banks take over one of Cyprus' ailing lenders, or demand an interest in natural gas fields that Cyprus has discovered in the Mediterranean.

Russian Prime Minister Dmitry Medvedev criticized the eurozone and Cypriot officials for their plan to seize deposits, comparing them to Soviet-style autocrats.

"So far, the actions of the European Union, the European Commission and the government of Cyprus have resembled that of an elephant in a china shop," Medvedev said in remarks carried Wednesday by the Interfax news agency.

Scrambling to avert a financial meltdown, Cypriot President Nicos Anastasiades held talks Wednesday with European and IMF officials. The eurozone and IMF must sign off on any Plan B the Cypriots come up with if it is to be approved as part of the bailout.

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