The European Central Bank has delivered an ultimatum to the government of Cyprus; fix your debt problem by Monday or your banks will become insolvent.

Reuters:

The ultimatum came as the island's leaders struggled over a "Plan B" to try to raise 5.8 billion euros demanded by the EU under a 10 billion euro ($13 billion) rescue, after angry lawmakers threw out a tax on deposits as "bank robbery".

The government said party leaders had agreed to create a "solidarity fund" that would bundle state assets as the basis for an emergency bond issue, but parliament speaker Yiannakis Omirou insisted a revised levy on larger bank deposits, many of them held by Russians, was not on the table.

The European Central Bank, which has kept Cyprus's banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off.

"Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks," it said.

Cyprus's central bank governor said he expected to clinch a financial support package by then. He did not say how.

The government has ordered banks to stay closed until Tuesday. The stock exchange also suspended trading for the rest of the week.

There were long queues at some bank branches in Nicosia as staff replenished cash machines, which have continued to operate while banks have been closed since last week.

In Moscow, Cypriot Finance Minister Michael Sarris said he was discussing possible Russian investments in the island's banks and energy resources to reduce its debt burden, as well as an extension of an existing 2.5-billion-euro Russian loan.

Note that ordinary people still do not believe that the depositors haircut is dead. And they are right. If it gets close to the deadline and Cypriots are looking at the collapse of their banking system and subsequent exit from the euro, those lawmakers who called the bailout "bank robery" may be faced with a take it or leave it proposition. In the end, the EU depositors hair cut plan may be the only game in town.

Russia may find it more prudent to take the haircut rather than risk billions more in an unsafe banking system. So in the end, something that nobody wants might end up being the solution anyway.