BERLIN - Europe's paymaster Germany stepped up pressure on stricken Cyprus on Friday, rejecting its proposal to nationalise pension funds to plug its finance gap and demanding it take an axe to its banks if it wants a bailout.
Chancellor Angela Merkel stuck to the hard line Berlin has been pushing for weeks, telling lawmakers that while she wanted to keep Cyprus in the euro zone, the country must first recognise it had no future as an offshore financial centre for wealthy Russians and Britons.
One of her conservative allies took to the airwaves to warn Cyprus it was playing a risky game by refusing to impose losses on depositors in its banking sector, which has swollen to eight times the size of the economy and is on the brink of collapse.
"I still believe we will get a settlement, but Cyprus is playing with fire," Volker Kauder, parliamentary leader for Merkel's Christian Democrats (CDU), told ARD public television.
The tough rhetoric from Berlin came as Russia rebuffed Cypriot demands for aid, leaving the island's increasingly isolated leaders mere days to satisfy their European partners or face a default that could reverberate across the 17-nation bloc.
EU leaders are now awaiting a "Plan B" from Cyprus. The government must come up with 5.8 billion euros by Monday, the day the European Central Bank has said it will cut off funds to Cypriot banks.
A closely-watched survey of German business morale on Friday showed that after a lull to start the year, the euro crisis was unnerving domestic firms again. The indicator from the Munich-based Ifo institute fell for the first time in five months.
With just six months to go until Germany holds an election, a poll for ZDF television showed that average Germans are also growing worried, with nearly two-thirds expecting the crisis to worsen and nearly half fearful for their savings.
In previous bailout standoffs with euro members like Greece, Merkel has demanded a high price for aid only to compromise at the last minute in order to avert disaster.
But with tiny Cyprus, a Mediterranean island of just a million inhabitants, she seems determined not to bend, even if that leads to bankruptcy.