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Cyprus Leaves Russia Empty-Handed, Talks Collapse

Simon Dawson | Bloomberg | Getty Images

Cyprus' lawmakers geared up to vote on a series of bills put forward in a renewed effort to strike a bailout deal with European partners on Friday after talks with Russia collapsed.

"The House of Representatives will soon be called upon to take the big decisions. Undoubtedly, there will also be painful aspects in any decision taken, but the country must be saved," government spokesman Christos Stylianides said in a statement. "The next few hours will determine the future of this country," he added.

Reuters reported that Cypriot leaders are discussing with their international lenders the adoption of a levy of more than 10 percent on bank deposits over 100,000 euros, a ruling party official said on Friday.

Parliament will discuss a number of alternatives to a controversial tax on bank deposits, including the creation of a "solidarity fund" of state, church and pension fund assets and the introduction of capital controls on its lenders to prevent capital flight when its banks re-open next Tuesday.

A banking bill is also being considered which would see the country's second-largest lender, the Laiki Bank, split into "good" and "bad" assets. Rumors that the bank could be wound down prompted heated public protests in the Cypriot capital, Nicosia, on Thursday.

And the situation may get worse. Laiki Bank CEO Takis Phidias told CNBC "I'm sure there will be a run on all banks... of course there will be."

He also said the bill before parliament allowing the central bank to restructure banks may not be the right approach. "It gives tremendous powers to the central bank of Cyprus to carry out a resolution of any, any bank or financial institution in Cyprus," he said.

Greece's Piraeus Bank was chosen on Friday to take over the Greek branches of Cypriot lenders, in a deal that helps shield Greek banks from the island's crisis and allows Cyprus to shrink its bloated banking sector.

The news sent European shares higher in mid-morning trade. Jane Foley, senior currency strategist at Rabobank, told CNBC that she was surprised at the relative calm in markets compared to last year when a Greek exit from the euro looked likely.

"The markets are jittery and clearly they'll stay jittery over the next couple of days. But the tone in the market isn't particularly nervous when we consider how markets were this time last year," Foley told CNBC Europe's "Squawk Box."

During a joint press conference with European Commission President Jose Manuel Barroso and Prime Minister Dmitry Medvedev, Barroso told reporters that he was confident that a resolution would be found.

(Read More: Cyprus Shuts Banks Until Tuesday, Seeks Russia Aid)

Cyprus faces intense pressure find a solution for an international bailout to avert a collapse of its banking sector and a possible exit from the euro zone.

The Cypriot parliament is reconvening for emergency talks on Friday after the European Union issued it with an ultimatum to raise the 5.8 billion euros ($7.4 billion) necessary for a 10 billion euro bailout package by Monday. The European Central Bank said it would cut off liquidity to Cypriot banks without a deal.

The Eurogroup of finance ministers released a statement on Thursday night, saying that it was ready to discuss any new proposals with Cyprus and was prepared to continue negotiations on an adjustment program with the country. It said it was ready to ensure the "stability of the euro area as a whole," the statement said.

(Read More: Are Markets Too Complacent Over Cyprus?)

A political ally of German Chancellor Angela Merkel said on Friday that Cyprus was "playing with fire" and needed to come up with a a workable proposal for plugging a multi-billion euro financing gap urgently. Germany's finance minister, Wolfgang Schaeuble, told the German Bild newspaper that he is skeptical about about the Cypriot parliament's current proposals, saying that "cosmetic changes are not enough," the newspaper reported.

Merkel herself, meanwhile, is reported to have told members of the German parliament that she she cannot accept the nationalization of pension funds in Cyrus, Reuters cited parliamentary sources as saying.

"Cyprus could be let go if they don't come up with a robust enough package. If they come up with something half-baked, that will be rejected and they will be let go. If they come up with something that clearly cuts higher deposits and puts money back into the banks and go about bank restructuring, that may work" Bill Blain, senior fixed income broker at Mint Partners, told CNBC.

Reuters contributed to this article.

Contact Europe: Economy

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