ECB divided over extra emergency funds for Greek banks

European Central Bank policymakers debated on Wednesday whether to allow more emergency funding for Greek banks with opinions divided as Athens came under pressure to accept an extended aid-for-reform programme.

Greece’s new leftist-led government said it will request an extension of a loan agreement on Thursday but it has yet to agree on the terms of any such deal with its euro zone creditors.

The ECB’s policymaking Governing Council was meeting to decide how far the cash-strapped country may support its troubled banks, which are suffering rising deposit outflows due to the political uncertainty.

While the ECB is unlikely to lower the ceiling on emergency lending assistance (ELA) by the Greek central bank, a refusal to increase it would be bad news for the banks, which are close to using up the full 65 billion euros granted so far.

The meeting of central bank chiefs from across the eurozone was expected to run into the evening. The ECB does not want to be sucked into an intensely political debate but the governors’ decision is a crucial part of the jigsaw.

“The question is how things will continue with Greece,” said one European official. “From the European side, there is the hope that one might find a way forward this week.”

The ECB’s decision two weeks ago to stop banks presenting Greek government bonds as collateral in return for funds raised pressure on Athens to reach a deal with the eurozone.

Talks among finance ministers broke down on Monday but there are rising expectations that a loan request will lead to an emergency Eurogroup meeting on Friday or at the weekend to clinch an agreement.

Opposition in EU paymaster Germany will make it difficult for the ECB to cut Athens any financial slack although other countries are in favour of doing so.

Bundesbank chief Jens Weidmann, who has warned against the misuse of the emergency funding to indirectly finance the Greek state, opposed any increase in the cap, the sources said.

But while some governors share his reservations, others want more leniency.

One eurozone central bank official forecast a “slight increase” in ELA for Greece, stressing that the ECB “has to try to preserve financial stability” and “its role is not to teach Greece some kind of lesson”.

CAPITAL CONTROLS? Unless Athens agrees an extended aid programme soon, keeping

ELA capped would put lenders in a funding squeeze that could require the introduction of capital controls to limit savers taking out more of their money, the sources said.

A senior Greek banker told Reuters up to 500 million euros ($571 million) had been withdrawn from Greek bank accounts on both Thursday and Friday last week.

There was a lull on Monday but deposit outflows picked up again on Tuesday after talks collapsed, the banker said. ECB officials are keeping tabs on such movements daily, people familiar with the matter said.

> said a European official. >

It was not clear whether the ECB would issue any statement after Wednesday’s meeting.

The ECB’s chief economist Peter Praet has cautioned that the funding is for the short term only.

One senior official said that ECB President Mario Draghi would turn first to European leaders to guarantee the solvency of Greek banks before considering whether to pull the plug on emergency liquidity.

Were the ECB to cancel all emergency funding, as it threatened to do with Cyprus in 2013, it would force Athens to choose between striking a new deal with its international lenders or facing bankruptcy.

> said Ashoka Mody, a former IMF official who helped design Ireland’s bailout.

>

[Reuters]