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Cyprus hunts for alternative to taxing bank deposits

NICOSIA, Cyprus — Scrambling to placate international lenders, Cyprus late Wednesday proposed to nationalize the country’s pension funds and conduct an emergency bond sale to help raise the roughly $7.5 billion the indebted country needs to secure a bailout.

The proposals are meant to slash the amount of money that would be raised by a controversial tax on bank deposits, as originally planned in a­ $12.9 billion international bailout package that the Cypriot Parliament rejected the night before.

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But even the revised plan contains a bank tax, that while much smaller than originally proposed, might still not be palatable to Parliament. Under the new plan, all Cypriot bank ­deposits of up to roughly $129,500 would be hit by a one-time tax of 2 percent. Deposits above that threshold would be subject to a 5 percent levy.

The fallback was being cobbled together as the finance minister pressed his case in Moscow on Wednesday in hopes of securing further aid.

The government extended through next Tuesday a bank holiday designed to prevent a run on institutions. Banks have frozen all ­accounts in a crisis here that risks tipping the country into default and sowing turmoil in the eurozone.

Banks have been closed since Saturday, and authorities have ordered banks to keep ­ATMs filled with cash as long as their doors remain shut. But that has been of little help to the thousands of international companies with accounts in ­Cyprus that cannot transfer money in and out of their ­accounts to conduct business.

The extended bank holiday is aimed at buying time for ­Cypriot authorities to reach an agreement with the International Monetary Fund, the European Central Bank, and the European Commission, which were not certain to approve ­Cyprus’ latest plan.

Three banks dominate the economy, and each is edging close to collapse. The government was also making tentative plans to merge at least two of them — Cyprus Popular Bank and Bank of Cyprus — and placing the healthy assets into one entity, while moving troubled assets into a so-called bad bank.

European officials are watching the situation with alarm, said one person with direct knowledge of the discussions, who was not authorized to speak publicly.

If a deal is not reached soon for a bailout that would support the banks, or if Cyprus does not find funds through some other route, European officials fear that ‘‘the damage would be enormous, and the country itself would be at risk of collapse,’’ the person said.

If that happens, the person added, officials are concerned that a clear risk would arise that Cyprus could ‘‘go out of the euro,’’ creating ‘‘a painful situation that would spur chaos.’’

The finance minister of Cyprus met Wednesday with his counterpart at the Russian Finance Ministry and with a deputy prime minister.

In a surprise twist, the head of the Church of Cyprus proposed putting all of its properties up as collateral so that the state could issue a new round of sovereign bonds to raise money. The church is one of the largest investors on the island.

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