Cyprus' embattled president was on Sunday in talks with Brussels and political rivals to ease the terms of a planned levy on smaller deposit holders as he tried to scrape together a parliamentary majority for a €10 billion bailout for the debt-laden island.
President Nicos Anastasiades is still intending to raise €5.8 billion from Cypriot bank accounts to help fund the bailout, an unprecedented move by the eurozone that could yet spark wider concern about the safety of bank deposits in the bloc.
Cypriot authorities were weighing an additional bank holiday on Tuesday pending emergency parliamentary ratification of the deal which would mitigate the danger of a bank run.
However, a revised deal being discussed in Nicosia, with the blessing of the European Commission, would shift more of the burden on to deposits larger than €100,000, according to officials involved in the talks.
Under a controversial deal struck with international bailout lenders in the early hours on Saturday, a 6.75 percent levy would be imposed on all deposits under €100,000 while accounts over that threshold would be hit with a 9.9 percent levy. The depositor levy was demanded by a German-led group of creditor countries to bring down the bailout's price tag from €17 billion.
The parliamentary passage of the levy is hanging in the balance. Several lawmakers from the Democratic party, the junior partner in the governing coalition, have threatened to vote no. The government controls only 28 of 56 seats in the chamber and is seeking backing from two deputies from a small pro-European party.
In a television address Mr Anastasiades appealed to Cypriots to accept the levy as the "least painful solution."
"Cyprus is in a state of extreme emergency," he said. "These are the most tragic events we have faced since 1974," when the Turkish military intervention following a Greek-inspired coup split the island and triggered an economic collapse.
He asked political parties to back the levy in Monday's vote "and decide in favour of our citiziens and our national interests."
"This solution is not what we wanted....but it leaves the running of the economy in our hands," he said. "And it opens the road to recovery and prosperity."
He said depositors would be offered bank shares covering the full amount of their losses, while those who left their savings in banks for another two years would be rewarded with bonds backed by future income from exploiting Cyprus's natural gas deposits.
European Union officials, including a European Central Bank delegation sent to the island on Saturday, were pushing political leaders hard to accept the deal, warning that without it ECB funding keeping the country's second-largest bank alive would stop and the financial sector could collapse.
"The ECB officials were very blunt," said one Cypriot official familiar with the discussions. "There are serious fears of contagion regarding Italy and Spain if this legislation doesn't go through."
Eurozone officials have insisted the Cypriot situation is unique and deposit haircuts would not be used elsewhere.
Officials involved in last night's talks said the changes in the levy's rates were in flux, but they could see the higher rate increase to as much as 12.5 percent while the smaller deposits could be about 3.5 percent.
Olli Rehn, the European Commissioner in charge of economic affairs, told the Financial Times that bailout lenders would not object to a shifting of the burden. "If the Cypriot political leaders decide on a more progressive scale for the one-off levy for the sake of social fairness, and if this has the same financial impact, the commission is ready to recommend that the eurogroup endorse such a decision."
According to senior officials involved in the talks, the German-led group of negotiators who insisted on the bank levy were agnostic as to where the axe fell. They said Mr Anastasiades, with the backing of the commission, had resisted a rate higher than 10 percent out of fear it would destabilize the financial sector even more.
One senior eurozone official said the ECB and other EU negotiators at one point suggested putting all the burden on larger depositors.
"We had proposed a levy with a rate of zero below €100,000, and a higher one afterwards," said the official. "The Cypriot president did not want to agree to a levy higher than 10 per cent, and if you do the numbers you get the 6.75 and 9.9 [percent]."
Cypriot officials insisted no levy on smaller depositors was impossible. One senior Cypriot official involved in the talks said that because about 35 percent of all deposits are below the threshold, exempting them would mean a rate so high for the rest that it would no longer be viewed as a tax.
"If this is successful then it will be used in the future," said the dejected official, predicting Spanish and Italian banks could face similar levies. "If this is not successful then who cares about Cyprus."
Archbishop Chrysostomos, the island's influential spiritual leader, called for Cyprus leave deposits intact, leave the eurozone and readopt its former currency, the Cyprus pound.