NICOSIA, Cyprus, March 22 (UPI) -- Cyprus wasn't even considered when European analysts weighed various scenarios that could cause the eurozone to start falling apart because of multiple financial crises affecting EU members.
But now the tiny Mediterranean island state is facing a fiscal meltdown and analysts warn it may take the eurozone with it if it fails to meet EU terms for a $13 billion bailout.
Previous predictions of events threatening the eurozone focused on continuing problems in Greece, Italy, Portugal and Spain. All those eurozone nations are still in crisis, Italy more so than others with political squabbling over the next government, but Cyprus poses the biggest threat, analysts said.
An EU demand that Cyprus tax its bank depositors in return for European Central Bank cash for its troubled economy has split Cypriot lawmakers and caused outrage among depositors across Europe, who fear a dangerous precedent is being set.
EU rescue packages for other eurozone countries sought to reassure depositors, shore up banks and prod governments into implementing spending cuts.
EU decision-makers argue that Cyprus is different because its bank deposits include large sums held in offshore accounts of Russian and other East European billionaires. EU analysts claim much of those funds amount to money laundering but are quiet when queried why the European Union allowed such alleged financial malpractices to take place in the first place.
Critics say the European Union is being populist in its effort to justify its controversial push for a tax on deposits.
Cypriot critics of the EU package say Brussels is discriminatory and the package, if implemented, will devastate the island republic's banking system and hurt Cypriot citizens.
EU talks with Cypriot leaders Friday centered on finding a compromise that would save Cyprus from bankruptcy and meet Brussels' terms for the rescue package. Hard-line European negotiators, led by Germany, said the ECB would deny Cypriot banks emergency funding unless there was a deal on EU terms by Monday.
The small size of Cypriot economy has led European negotiators to argue letting Cyprus fail won't hurt the eurozone much, as EU investment in Cyprus remains small. Opponents of the argument warn that a Cypriot exit from the eurozone will spread the contagion across Europe.
Cyprus hasn't said it wants to leave the eurozone but if its banks fail the resulting collapse will make its exit from the eurozone inevitable.
The government is under pressure from the European Union and the International Monetary Fund to raise 7.5 billion to qualify for the bailout.
A heavy dip into the island republic's pension funds, cash from its churches and state assets was under discussion Friday as part of the emergency funding plan after Russia turned down a Cypriot plea for cash in return for mortgage on the country's energy industries.
The Cypriot crisis illustrates how far the European Union has come in its rethink of cash injections in its member countries' troubled economies. The proposed rescue package for Cyprus is about 24th of the cash bailouts awarded to Greece.
Western and northern European member governments are under increasing voter pressure to restrict bailouts that are largely funded by the taxpayer in those countries.