BRUSSELS - Tense talks between Cyprus and its international creditors on how the country can secure a 10 billion euro bailout were stuck Sunday due to disagreements over how to shrink the bloated Cypriot banking sector, an official said.
Without a deal by Monday night, the tiny Mediterranean island nation faces the prospect of a bankruptcy, which could force it to abandon the euro currency and spur turmoil in the 17-nation eurozone of 300 million people.
Nicosia is trying to find ways to raise 5.8 billion euros so that it can qualify for the 10 billion euro rescue loan package from the International Monetary Fund and the other eurozone countries. The European Central Bank has threatened to stop providing emergency funding to Cyprus' banks as of Tuesday if there is no agreement on how to raise that 5.8 billion euros.
A man passes an empty closed branch of Bank of Cyprus in central capital Nicosia, Cyprus, Sunday. A top European official is leading a high-level meeting Sunday afternoon in a last-ditch effort to help Cyprus come up with a plan necessary for a 10 billion euro bailout loan that would save it from bankruptcy.
With the clock ticking, Cypriot and European officials pursued a marathon negotiation in Brussels on Sunday, and the atmosphere was very tense.
The eurozone and the IMF are insisting that Cyprus implements a yet more radical restructuring of its banking sector that involves breaking up the nation's biggest financial institute, Bank of Cyprus, said the Cypriot official, who spoke on condition of anonymity because he wasn't allowed to divulge details from the closed-doors meetings.
Cyprus has already decided to restructure the country's second largest lender, Laiki, which suffered heavy losses after being exposed to toxic Greek debt and other bad assets.
But the international creditors seek a yet more fundamental restructuring of the outsized financial system, which is worth up to eight times the country's gross domestic product of about 18 billion euros. That would reduce the amount of bailout loans the country needs. They also say that the country's business model of attracting foreign investors, among them many Russians, with low taxes and lax financial regulation has backfired and must be upended.
Cypriot President Nicos Anastasiades and his finance minister were meeting with representatives of the so-called troika of international creditors- the International Monetary Fund, the European Central Bank, and the European Commission, the EU's executive arm, to work out final details, officials said.
The negotiations dragged on, and the start of the meeting of the Eurogroup of the bloc's finance ministers was postponed by three hours, until 9 p.m. local time.
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 statement Sunday.
Cyprus needs significantly more than the 10 billion euro bailout, but the international creditors fear that more loans would raise the country's debt to an unsustainable level. For that reason, Cyprus has been told it must raise the additional money by itself.
Officials fear that a collapse of the Cypriot banking system and an ensuing government default would force the country to become the first eurozone member to leave the currency bloc. That would likely roil markets and result in uncertainty that could engulf other eurozone nations, leading to capital flight and higher government borrowing costs.
Despite that risk, Europe's biggest economy maintained a hard line on the negotiations. German Finance Minister Wolfgang Schaeuble said in an interview "if possible we want to avoid seeing Cyprus sliding into insolvency." But he cautioned that he is "known for not giving in to blackmail, by nobody and nothing."
Heading into the meeting of finance ministers in Brussels, Schaeuble said an agreement can be reached if Cyprus meets creditors' demands.
"I hope we can get to a result today. But that of course requires that the situation is viewed realistically in Cyprus," he said. "This is not about us - the decision lies with Cyprus."
"I'm expecting quite a long night," added Irish Finance Minister Michael Noonan. "I think a deal will be done tonight but I think it will be late, because a lot of detail has to be worked out."
A plan agreed to in marathon negotiations earlier this month called for a one-time levy on all bank depositors in Cypriot banks. But the proposal ignited fierce anger among Cypriots because it also targeted small savers. It failed to garner a single vote in the Cypriot Parliament.
The idea of some sort of deposit grab has also returned to the fore after Cyprus' attempt to gain Russian financial aid failed this past week, with deposits above 100,000 euros at Bank of Cyprus possibly facing a levy of up to 25 percent if the bank isn't restructured.
In an illustration of the depth of the fear of a banking collapse, Cyprus' central bank on Sunday imposed a daily withdrawal limit of 100 euros ($130) from ATMs of the country's two largest banks to prevent a bank run by depositors worried about their savings.
Cypriot banks have been closed this past week while officials have worked on a rescue plan and are not due to reopen until Tuesday. Cash has been available through ATMs, but many have run out quickly.
About 50 people protested outside the European Council building in Brussels where the finance ministers were meeting. They waved a Cypriot flag and a sign saying: "Enough is enough. Cyprus is not a second-class EU state."
Any agreement on a bailout package will have to be approved by the eurozone's finance ministers. 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 Cyprus' banking system.
Cyprus already took significant steps toward cementing a new plan Friday night, when its lawmakers voted to restructure the banking sector, 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 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 loans.