BERLIN — The euro currency union, a centerpiece European policy for a generation, edged toward a rupture on Thursday when the region’s central bank said it was ready to pull the plug on Cyprus.
The stark ultimatum came in a terse statement from the European Central Bank’s governing board that on Monday it would cut off the flow of euros to Cyprus’s financial system unless the country’s leaders reach terms with the International Monetary Fund and other European nations on an international bailout.
Multimedia
VIDEO | The Washington Post's Ezra Klein and Neil Irwin of WonkBlog discuss a Cyprus bailout proposal that would tax all deposits in Cypriot banks.
More business news
Associated Press
The brother of a jailed one-time billionaire hedge fund boss has been charged with conspiring with his brother to cheat on Wall Street.
Michael Birnbaum and Howard Schneider
The central bank says it will cut off funds to the country next week if they can’t reach a bailout agreement.
Michelle Singletary
Also in the Color of Money e-letter: More on taxes and NYC’s anti-teen pregnancy campaign.
More business news
The IMF and other euro zone countries have offered to lend Cyprus around$13 billion, but expect the country to come up with $7.5 billion on its own through taxes, government spending cuts or other measures to help restart a banking system that is essentially broke. A plan to raise the money by taxing bank deposits — including tens of billions of dollars held by Russians and other foreigners -- collapsed earlier this week in the Cypriot parliament.
Because Cyprus is small and its banks aren’t so wired into the international system, a failure likely wouldn’t trigger the kinds of global problems feared if Greece or another euro nation were to leave the currency union. Still, the uncertain fallout from a Cyprus exit fueled an intense hunt for options — from a nationwide bank restructuring that would put the largest Cypriot banks out of business, to more unusual proposals like mortgaging the property of the Orthodox Church, selling off natural gas rights, or simply asking for donations.
Those details, however, were overshadowed by the larger issues — of a developed world central bank flexing its muscle over a nation’s leaders and of the possibility that the euro zone, after years of insisting otherwise, may finally have to admit that its membership is not sacrosanct.
Central banks in the developed world have taken on outsize influence since the collapse of Lehman Bros. in 2008. The U.S. Federal Reserve has made massive asset purchases and recently established a target unemployment rate, and the Bank of Japan has committed to engineering higher prices to “reflate” the country’s economy.
Throughout Europe’s now three-year-old financial crisis, the ECB has proved an aggressive arbiter in a currency union that’s still a political work in progress. At key points, its willingness to venture into uncharted waters by buying government bonds or taking other extraordinary steps has give political leaders time and financial leeway to make tough economic choices — and arguably kept the currency zone intact.
But the ECB has also shown the limits of its patience, most notably when it undercut the government of former Italian leader Silvio Berlusconi when he tried to back out of budget cuts that ECB members felt were important to Italy’s financial rehabilitation.
Cyprus’s finances are in such disarray that its banks don’t qualify for the standard ECB loans that euro zone financial institutions depend on. The alternative, an ECB program called Emergency Liquidity Assistance, is only reserved for banks that have a cash flow crisis but are fundamentally solvent. The ECB has funneled billions of dollars into Cyprus under that program. But with no rescue plan in sight, and a massive deposit run likely once the country’s banks reopen, the ECB concluded it must leave the tiny island to fend for itself.
The stark ultimatum came in a terse statement from the European Central Bank’s governing board that on Monday it would cut off the flow of euros to Cyprus’s financial system unless the country’s leaders reach terms with the International Monetary Fund and other European nations on an international bailout.
Multimedia
VIDEO | The Washington Post's Ezra Klein and Neil Irwin of WonkBlog discuss a Cyprus bailout proposal that would tax all deposits in Cypriot banks.
More business news
Associated Press The brother of a jailed one-time billionaire hedge fund boss has been charged with conspiring with his brother to cheat on Wall Street.
Michael Birnbaum and Howard Schneider The central bank says it will cut off funds to the country next week if they can’t reach a bailout agreement.
Michelle Singletary Also in the Color of Money e-letter: More on taxes and NYC’s anti-teen pregnancy campaign.
More business news
The IMF and other euro zone countries have offered to lend Cyprus around$13 billion, but expect the country to come up with $7.5 billion on its own through taxes, government spending cuts or other measures to help restart a banking system that is essentially broke. A plan to raise the money by taxing bank deposits — including tens of billions of dollars held by Russians and other foreigners -- collapsed earlier this week in the Cypriot parliament.
Because Cyprus is small and its banks aren’t so wired into the international system, a failure likely wouldn’t trigger the kinds of global problems feared if Greece or another euro nation were to leave the currency union. Still, the uncertain fallout from a Cyprus exit fueled an intense hunt for options — from a nationwide bank restructuring that would put the largest Cypriot banks out of business, to more unusual proposals like mortgaging the property of the Orthodox Church, selling off natural gas rights, or simply asking for donations.
Those details, however, were overshadowed by the larger issues — of a developed world central bank flexing its muscle over a nation’s leaders and of the possibility that the euro zone, after years of insisting otherwise, may finally have to admit that its membership is not sacrosanct.
Central banks in the developed world have taken on outsize influence since the collapse of Lehman Bros. in 2008. The U.S. Federal Reserve has made massive asset purchases and recently established a target unemployment rate, and the Bank of Japan has committed to engineering higher prices to “reflate” the country’s economy.
Throughout Europe’s now three-year-old financial crisis, the ECB has proved an aggressive arbiter in a currency union that’s still a political work in progress. At key points, its willingness to venture into uncharted waters by buying government bonds or taking other extraordinary steps has give political leaders time and financial leeway to make tough economic choices — and arguably kept the currency zone intact.
But the ECB has also shown the limits of its patience, most notably when it undercut the government of former Italian leader Silvio Berlusconi when he tried to back out of budget cuts that ECB members felt were important to Italy’s financial rehabilitation.
Cyprus’s finances are in such disarray that its banks don’t qualify for the standard ECB loans that euro zone financial institutions depend on. The alternative, an ECB program called Emergency Liquidity Assistance, is only reserved for banks that have a cash flow crisis but are fundamentally solvent. The ECB has funneled billions of dollars into Cyprus under that program. But with no rescue plan in sight, and a massive deposit run likely once the country’s banks reopen, the ECB concluded it must leave the tiny island to fend for itself.