Forex Flash: Deterioration of large Cypriot bank prompted ECB action - BBH

Brown Brothers Harriman analysts note that it was the deterioration of a large Cypriot bank which prompted the ECB to threaten to cut off access to ELA (the emergency lending assistance provided by the national central bank at their risk, but with the permission of the ECB).

They comment that this would have set off a cascading set of events that would have realistically led to the collapse of the entire banking system in the beleaguered nation. Further, they note that it would also leave the government facing EUR30 bln bill to cover the depositors, which it could not afford. They write, “Although Germany balked at keeping large depositors whole, reports indicate it was the ECB, the EU, and Cyprus itself that insisted on taking from small depositors as well. The IMF, which had in recent weeks been signaling that depositors were vulnerable, also would have kept small depositors whole, according to reports. The revised measures, however, continue to tax small depositors. Indeed by calling it a tax, the deposit insurance does not get triggered.”