“Following the Cypriot parliament’s total rejection of the controversial bank bailout deal reached by EU finance ministers over the weekend, the ECB released a statement saying that it would provide liquidity to Cyprus “within the existing rules.”
Emergency Liquidity Assistance is the ECB’s last recourse for euro zone banks that find themselves unable to raise funding in the open market through bond issuance.
However, as several pointed out following the statement, Cypriot banks probably don’t even qualify for ELA, which means the ECB may have really been saying something more along the lines of “don’t count on it.”
Deutsche Bank economist Gilles Moec explains in a note to clients.
“The provision of ELA funding is normally conditional on the receiving banks remaining intrinsically solvent,” says Moec. “With the prospect of a bank run starting immediately after the expiry of the bank holiday, this condition hardly holds.”
In fact, Moec writes that the ECB is probably even incentivized NOT to step in and provide assistance for the Cypriot banking system: …”
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