The European Central Bank is prepared to cut off funding to Cyprus and let the Mediterranean island succumb to financial meltdown if it has to, confident it has unlimited firepower to protect the rest of the eurozone.
Cyprus propelled the 17-nation bloc into uncharted waters on Tuesday by rejecting a proposed levy on bank deposits as a condition of a 10-billion euro (US$12.9-billion) EU bailout.
Without the aid, much of it to recapitalize Cypriot banks, the ECB says they will be insolvent, and it requires banks to be solvent for them to receive central bank support.
AS A follow-up to this morning's post on Italy and the European Central Bank, I'd like to make a point about the use of communication by central banks. The Federal Reserve has been engaged in monetary easing for several years now, a process which has involved huge purchases of various kinds of assets.
True that the recent UK credit downgrade attracted a lot of attention, however as some analysts pointed out, it did not reveal anything new. We all know UK growth is flat-lining and the Government’s austerity measures are failing to translate into deficit reduction. The Eurozone faces an even greater challenge as the economic fortunes of member countries diverge.
Indeed, there are many factors which suggest that a loosening of ties with the Eurozone by British businesses is possible, if not already under way.
The new plan to bolster the troubled euro currency was announced Thursday at a meeting in Frankfurt. ECB president Mario Draghi is under immense pressure to prevent the collapse of the 16-nation eurozone. The bank did not lower interest rates, as some investors hoped, but did unveil steps to ease the zone's debt crisis.