ECB Hands Cyprus Ultimatum With Liquidity Guarantee

The European Central Bank said it will cut Cypriot banks off from emergency funds after March 25 unless the Mediterranean island agrees on a bailout with the European Union and International Monetary Fund.

“The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance, ELA, until Monday, 25 March 2013,” the Frankfurt-based ECB said in an e-mailed statement today. “Thereafter, ELA could only be considered if an EU/IMF program is in place that would ensure the solvency of the concerned banks.”

The Cypriot parliament this week rejected a proposed levy on bank deposits to raise 5.8 billion euros ($7.5 billion), which euro-area finance ministers backed as a condition for the country’s bailout. A bank holiday in Cyprus has been extended to March 25, giving policy makers until Monday to find a compromise to prevent a collapse of the country’s banks.

“With this statement, the ECB put even more pressure on European finance ministers and the Cypriot government to come up with a deal,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “But we’ll have to see whether they’ll actually follow through with their threat if there’s no deal by Monday and policy makers decide to further extend the bank holiday.”

’Poker Game’

Cypriot central bank governor Panicos Demetriades told reporters in Nicosia today after meeting political leaders that he expects a ``program of support'' for Cyprus by Monday.

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.

The ECB can “only provide emergency liquidity to solvent banks,” Executive Board member Joerg Asmussen said yesterday in an interview with German newspaper Die Zeit. 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,” he said.

The central bank’s threat to cut Cypriot bank funding “is an attempt to show politicians that they need to act,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “It’s a bit of a poker game but some kind of deal will be found before it’s too late.”

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