The European Central Bank (ECB) warned Cyprus on March 21 that it would stop providing emergency funding on March 25 unless the government finds a way to come up with 5.8 billion euros ($7.5 billion) to trigger a 10 billion euros ($13 billion) from international lenders which include the ECB.
Cypriot banks have been closed since March 15 and are expected not to reopen until March 26 at the soonest as the government scrambles to find a way to get the money after the Parliament voted 36-0 to reject demands to confiscate up to 9.9 percent of private bank deposits.
Cyprus’ economy is near collapse because its state banks held vast amounts of Greek bonds were devalued by 74 percent and the institutions gave huge loans to Greek businesses that went under in that country’s crushing economic crisis. The ECB, along with the European Union and International Monetary Fund want bank depositors who were not to blame for the problem to pay for it.
If the ECB goes ahead with its threat, the Cypriot banks could collapse overnight, bring down the economy and threaten the 17-member Eurozone and the country would default, which market analysts said could create chaos in the markets. As the government grapples with the crisis, the lenders are still insisting the government seize depositors’ money.
Whatever happens, there are still fears of a run on the banks when they reopen, including by Russians who hold nearly 30 percent of the 68 billion euros ($87.8 billion) in Cypriot bank accounts. Much of that, EU officials fear, is being used as a money-laundering mechanism for rich Russians and mobsters. “The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013,” it said in a statement.
The ECB said if Cyprus doesn’t relent or find the necessary money somewhere else then its central bank won’t be funded. “Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks,” the ECB said in a statement. Cyprus Popular Bank (Laiki) – the island’s largest lender – in particular would not be eligible for emergency funding under the ELA terms as it would be deemed insolvent.
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