The credit markets lost ground on Thursday amid ongoing nerves surrounding Cyprus and disturbing economic news from the eurozone.

The ECB cranked up the tension when it warned Cyprus that it would withdraw Emergency Liquidity Assistance (ELA) to the country's banks if a bailout deal isn't reached by Monday. Banks in Cyprus are closed until Tuesday, giving the government just a few days before the ECB pulls the plug. The two largest Cypriot banks are dependent on ELA for funding, and its withdrawal would mean their demise unless alternative funding sources can be found. ELA is provided by the national central bank but it can be suspended if the ECB's governing council deems that the institution is insolvent.

If Cyprus does manage to negotiate and approve a bailout then we may never find out whether the ECB intends to carry out its threat. A collapse of two major banks could force Cyprus out of the eurozone, a scenario that the ECB has been doing "whatever it takes" to avoid. Perhaps the ECB's statement was intended to concentrate the minds of Cypriot policymakers, who have been floundering since parliament rejected the initial bailout plan.

The latest proposal from Cyprus is a "solidarity fund", which will be collaterised by a variety of state assets. Natural gas revenues, state social security reserves and church property have all been touted as possible sources of finance. Russia may also have a role to play, though the Cypriot finance minister appears to have had little luck so far in convincing Putin's government to part with any cash. Another loan from Russia doesn't appear feasible as it would only add to Cyprus's considerable debt burden.

Maybe Russia will contribute to the solidarity fund, though it is likely that it would want a strategic asset in return. Cyprus is still an EU member and we may still see some form of deposit tax, however unpopular it is in Moscow.

Cyprus's CDS were slightly wider at 29 points upfront and remained relatively illiquid. The eurozone's finance ministers are holding a teleconference at 1800GMT and making a statement immediately after - its contents will shape market sentiment tomorrow.

The troubling Cypriot situation has held the market in limbo this week, and the Markit iTraxx Europe S19 index traded in a relatively tight range around 118.5bps today. Leading economic indicators didn't help the market mood. In particular, the Markit Flash Eurozone PMI fell to its lowest level in four months. France continues to contract and the gap with Germany is still a chasm.

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