ECB set to keep Greece on tight funding leash

[FRANKFURT] Eurozone central bank chiefs are likely to maintain their existing cap on a funding lifeline to Greece when they meet on Wednesday, people familiar with the matter said, keeping pressure on Greece as its lenders run out of cash.

Hopes that Greece may be willing to soften its stance after a failed last-minute attempt to avert default to the International Monetary Fund will discourage the central bankers from taking more radical action, such as calling in some of the emergency funds already provided.

The Governing Council of decision makers has pared back support to a bare minimum ahead of a bailout referendum that could decide Greece's future in the euro, but is reluctant to do anything that further destabilises Greece's feeble lenders.

Tightening the Emergency Liquidity Assistance to Greek banks, used to make payouts, could force Greece to lower its 60-euro-a-day limit on cash withdrawals. That would risk turning public opinion against the euro ahead of the referendum.

"Freezing the level of ELA would say to Greece that we are not very happy with the situation but also that we are not going to be the ones to pull the plug," said one person familiar with preparations for the meeting. "It's a very delicate situation," the person said.

"Things are getting tougher day by day for Greece."

President Mario Draghi will chair the gathering of euro zone central bank heads and his own executive in the ECB's Frankfurt headquarters at around the same time as euro zone finance ministers talk by phone.

Athens is set to put new proposals for a two-year loan agreement and a debt rescheduling to the euro zone ministers after hinting that leftist Prime Minister Alexis Tsipras might be willing to scrap a referendum on the reform demands they made in return for more bailout money, which the government rejected.

Finance Minister Yanis Varoufakis told his eurozone counterparts on Tuesday that the ruling Syriza party might even urge Greeks to vote "Yes" in Sunday's plebiscite if Athens is granted a fresh loan, participants in the call said.

A strict limit on cash withdrawals has prevented savers taking out large sums of money, which means that the current level of emergency liquidity, used to make such payouts, may now be enough to see Greek banks through the week.

Nonetheless, there are different views on the matter. While some will push for leniency, Germany's powerful Bundesbank, which has long argued for the funding to be reined in, will likely stick to this stance on Wednesday.

One way of addressing its concerns would be to slightly tighten the terms of such funding.

The ECB could, for instance, adjust the discount applied to the security that Greek banks provide in return for Emergency Liquidity Assistance, making it harder for lenders to access the funds, but not significantly.

This would essentially be a symbolic step to show that the ECB was taking into account the risk of releasing central bank funding to the banks of a state that is on the brink of insolvency if not already bust, people familiar with the matter have said.

The Greek government ordered its banks to close and imposed capital controls after the ECB, which had been steadily increasing its funding as withdrawals from Greek banks soared, froze it on Sunday.

REUTERS

Read more on the Greek crisis here