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ECB to delay vote on Cypriot emergency lending funds

FXstreet.com (Barcelona) - The European Central Bank (ECB) is likely to prolong the agony in Cyprus and delay any matter of decision regarding the continuation of supplying Cypriot banks with emergency funds as it awaits clarity country’s bailout. As such, the ECB postulates that a bank holiday in Cyprus will be extended to the end of the week, coupled with a public holiday on March 25. In essence this leaves policy makers off the hook as they means don’t need to vote on whether to extend or halt Emergency Liquidity Assistance (ELA) to Cypriot banks at their mid-month meeting in Frankfurt, which starts today and ends tomorrow.

Indeed, the reprieve 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 little to no interest in instigating a collapse before a political decision has been taken, according to anonymous sources.

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, already 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 €5.8B, 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.

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