Demonstrators from the bank union protest outside the Cypriot finance ministry in Nicosia, Cyprus, on Saturday, March 23, 2013. Cyprus will complete a plan today to meet the terms of a European bailout that may include taxing bank deposits, its finance minister said, as the Mediterranean island races to avert financial collapse. Photographer: Simon Dawson/Bloomberg

Reuters and Bloomberg Beijing andNicosia

Developing nations must be ready for a financial market selloff if the Cypriot banking sector collapses, World Bank managing director Sri Mulyani Indrawati said yesterday, urging a swift resolution to the crisis in Cyprus.

In an interview on the sidelines of a forum in Beijing, Indrawati said she was watching very closely the outcome of a plan to levy a one-off tax on Cypriot deposits as part of a deal to obtain a bailout from the EU.

Her remarks contrast with those of German politicians, who have suggested contagion from Cyprus, an island of a million inhabitants, would be limited. Europe’s financial markets have also traded in relative calm since the Cyprus crisis flared up.

Yet with attention on Cyprus, a poor reception from investors to the final plan to save the Cypriot economy may be contagious and could threaten other vulnerable nations, especially those in Europe, Indrawati said.

“The first impact on this global environment from this Europe situation comes from perception because it is psychological,” she said. “And that is contagious because it is coming from the capital market, from the equity market, from the financial sector.”

Cypriot President Nicos Anastasiades is seeking a last-minute reprieve from financial meltdown at talks in Brussels yesterday, racing against today’s deadline to avoid a financial collapse and the nation’s potential exit from the euro zone.

Cyprus' overgrown banking sector is suffering from investment losses in Greece, and the EU says the island must raise e5.8 billion (R70bn) on its own before it can receive a e10 bnbailout.

A Cypriot official said the government had agreed on a 20 percent levy over and above e100 000 at the country’s largest bank. An earlier proposal that included a levy on small savers sparked public demonstrations and was rejected by lawmakers.

“We have to watch very carefully what is happening in Cyprus,” Indrawati said. “Not only the psychology but… settlement related to the banking system and the treatment of deposits,” she said. “The global economy cannot afford to have more volatility again. That is why policymakers need to do the right thing in a very quick way so as to reduce the volatility and the uncertainty.”

As thousands of protesters marched through the capital Nicosia on Saturday, Cypriot officials worked to broker a deal with the European Central Bank, European Commission and International Monetary Fund on how to raise the money needed to qualify for aid.

The talks had ended at a “very sensitive stage” on Saturday night and continued in Brussels yesterday, the government said. EU finance ministers were due to convene in Brussels last night.

“There are only hard choices left,” EU economic and monetary affairs commissioner Olli Rehn said. “It is essential that an agreement is reached… on a financial assistance programme.”

The third-smallest economy in the 17-nation euro zone was plunged into chaos last week when legislators rejected an EU proposal to confiscate a portion of all bank deposits in order to qualify for a bailout.

“We cannot fund banks that are bankrupt,” ECB council member Erkki Liikanen said on Saturday.

“There is now a chance of drawing up a programme in which the banks are recapitalised or reorganised to reach solvency. The ball is in Cyprus’s court.”