The European Central Bank warned Cyprus on Thursday morning that the island’s banks might not qualify for emergency lending when they reopen next week.
Cypriot banks have remained closed this week and will not open again until Tuesday as the government tries to find a way to secure funding after rejecting an initial proposal from the Eurogroup for a deposit tax.
Amid fears of a bank run if the lenders open to customers, the government has taken the decision to keep banks closed in the hope that stability will return in the meantime.
However, the ECB announced that it would cut off funding to Cypriot banks next week if the government has not agreed on the terms of a bailout with the eurozone and the 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,” it said in a statement.
“Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.”
It is thought Cyprus Popular Bank (Laiki) – the island’s largest lender - in particular would not be eligible for emergency funding under the ELA terms as it would be deemed insolvent.