Cyprus ELA shoots to EUR 9.6 bln in July

The absence of a government deal with the troika is leading to a growing liquidity crisis for one or more Cypriot banks, judging from the latest Central Bank data.
“Other claims on euro area credit institutions denominated in euro”, the proxy for Emergency Liquidity Assistance (ELA), shot up to EUR 9.6 bln in July, from EUR 8 bln in June, EUR 5 bln in May and only EUR 130,563 in July 2011.
Moreover, the increase is not entirely explained by the reduction in borrowing from the European Central Bank (ECB) after it refused to accept Republic of Cyprus bonds as collateral.
“Lending to euro area credit institutions related to monetary policy operations denominated in euro”, the proxy for ECB liquidity assistance, did fall to EUR 3.7 bln in July from EUR 5.2 bln in June.
However, the sum of assistance provided by the ELA and ECB rose to EUR 13.3 bln in July from EUR 13.2 bln in June and EUR 10.8 bln in May.
In May 2011 this total was only EUR 5.5 bln.
Banks cannot access ECB assistance again until the deal with the troika (the ECB, European Commission and IMF) has been signed.
However, since applying for the European Financial Stability Facility (EFSF) on June 29th the government has not put forward any reforms.
Instead it has concentrated efforts on removing the heads of the two largest banks in order to place the blame on the crisis on the banking sector.
Minutes leaked last week from the troika’s meeting with the House Finance Committee cited a European Commission official saying that the economic challenges stemmed both from fiscal imbalances and the banking sector and that the public finances “were in a worse shape than expected”.

Fiona Mullen
www.sapientaeconomics.com