German Chancellor Angela Merkel rejected on Friday morning the idea of Cyprus using its social security funds to securitize a solidarity fund it hopes will contribute towards the country’s overall bailout.

Cyprus was planning to use up to 4 billion euros of the funds' reserves to back the investment fund it wants to create to raise the 5.8 billion euros needed to meet the troika's terms for a 10-billion-euro bailout. Merkel's position indicates the troika will reject such a plan.

According to reports of a parliamentary briefing, the German leader said she wants Cyprus to remain part of the eurozone but that it would have to abandon its current business model to do so.

Merkel was also quoted by two MPs from her centre-right coalition as saying that debt sustainability and the restructuring of its banks must be core elements of any new Cyprus deal, which she called a matter of «credibility», Reuters reported.

Volker Kauder, leader of the ruling Christian Democrats (CDU) in parliament, also rejected the suggestion that Cyprus might nationalise pension funds of semi-public companies to fill the hole, saying this was a worse solution than hitting small savers in the Mediterranean island's banks.

"I don't think this can happen, because this would be huge for pensioners, for the small people. So I don't think this is a proposal that helps,» Kauder told public television station ARD.

"If a proposal comes, I am optimistic. But we aren't there yet,» he added. «I still believe we will get a settlement, but Cyprus is playing with fire."

Two Cypriot banks are threatened with insolvency, the situation is serious,” Steffen Seibert, spokesman for German Chancellor Angela Merkel said in Berlin March 20.

“A fix should be made possible, but that can only happen through involving investors. Insolvency and winding down would mean a far higher loss for each investor than the (Cypriot) share that’s envisaged. To that end, the Eurogroup and the German government see it as mandatory that investors are brought in.”