Brussels: The European Union has warned debt-stricken Cyprus on the eve of crucial negotiations on its future that it will have to make "hard choices" and asked the country to reach an agreement with its euro zone partners on a rescue package to avert a bankruptcy.
It is essential that an agreement is reached by the euro zone finance ministers at their meeting in Brussels on Sunday evening on a 10 billion-euro (USD 13 billion) financial rescue package offered by the EU and the International Monetary Fund over a week ago, EU commissioner for economic and monetary affairs Olli Rehn said.
"Unfortunately, the events of the past days have led to a situation where an optimal solution is no longer available," Rehn said in a statement on Saturday night.
"Only hard choices are left Sunday," he said.
He made the statement as negotiators of the Cypriot government and representatives of the "troika" comprising the EU commission, the International Monetary Fund and the European Central Bank broke up their negotiations in Nicosia on ways to avert a financial meltdown and decided to continue their talks in Brussels.
Rehn said the negotiations made some progress and he hoped they can "pave the way for an agreement on a financial assistance programme".
Convening of the emergency meeting by the finance ministers and participation by Cyprus president Nicos Anastasiades are seen as strong indications that an agreement is in the offing.
In a dramatic U-turn, the country's political leaders are again considering a controversial levy on bank depositors to raise 5.8 billion euros to secure the bailout, which was overwhelming rejected by the parliament on Tuesday.
The turnaround came after Russia, whose citizens have billions of euros of deposits in Cypriot banks, early last week turned down a request for help from the government.
Media reports said discussions are focusing on a plan to impose a one-off levy between 15 and 20 percent on deposits above 100,000 euros in the country's largest bank, the Cyprus Bank, where wealthy Russians have reportedly parked billions of euros and four percent over the same level in all other banks.
The original plan was to charge a one-time 6.75 percent levy on deposits between 20,000 euros and 100,000 euros and 9.9 percent above that level.
A major part of the bailout package offered by the EU and the IMF is intended to recapitalise the largest banks, whose collapse could force the country out of the euro zone.
The island's banking sector was crippled by its exposure to Greek debts and loss of payments from Greek businesses. The ECB last week threatened to cut off its emergency assistance for Cypriot banks if no viable plan to raise 5. 8 billion euros is presented by Monday.
After the parliament rejected the bank levy plan, political leaders have been desperately trying to come up with a "Plan B" that would satisfy the international lenders.
On Friday, the parliament agreed to set up a "national solidarity fund" to raise 5.8 billion euro, but politicians are still debating how to pool state assets and contributions pledged by the Orthodox Church.
A plan to tap the national pension fund was dropped after objection from euro zone partners, including Germany, which argued that it will more painful to ordinary citizens than a levy on deposits.
The parliament also agreed to restructure the country's banks by splitting them into "good" and "bad" banks and authorised the government to impose capital controls, fearing a flight of capital abroad when the banks reopen on Tuesday.
Rehn said: "It is clear that the near future for Cyprus will be very difficult." However, support from Europe can help minimise the economic damage and to protect the most vulnerable population from the effects of the financial crisis.
Cyprus and its people are part of the European family and the EU stands by them and will help rebuild the nation's economy, he said.