March 20 (Bloomberg) -- The European Central Bank is likely to delay a decision on whether to continue to supply Cypriot banks with emergency funds as it awaits clarity on the nation’s bailout, two people familiar with the deliberations said.
The ECB assumes that a bank holiday in Cyprus will be extended to the end of the week, and there is a public holiday on the Mediterranean island on March 25, the people said on condition of anonymity. That means policy makers don’t need to vote on whether to extend or halt Emergency Liquidity Assistance to Cypriot banks at their mid-month meeting in Frankfurt, which starts today and ends tomorrow, the people said.
The delay gives the Cypriot government and euro-area finance ministers five more days to forge a deal to prevent the implosion of the island’s banking sector. The ECB has no interest in forcing a collapse before a political decision has been taken, the people said.
Cypriot banks have relied on ELA funding from their own central bank since they were cut off from regular ECB refinancing operations in June following the downgrading of the country’s credit rating by all three major rating firms to junk status.
The ECB, which must sanction the ELA loans, agreed to a two-month extension in January and was due to take another decision on the issue at the mid-March meeting, one of the people said.
The Cypriot parliament yesterday rejected a proposed levy on bank deposits to raise 5.8 billion euros, which euro-area finance ministers backed as a condition for the country’s bailout.
While the ECB is showing a willingness to wait for political developments, it has made clear that if those efforts ultimately fail Cyprus can’t expect central bank funds to keep flowing. Executive Board member Joerg Asmussen told Die Zeit newspaper today that the ECB can “only provide emergency liquidity to solvent banks.”
The solvency of Cypriot banks “can’t be considered a given unless an aid package, which ensures a fast recapitalization of the banking sector, is agreed soon,” Asmussen said.
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