Greece faces resistance to extra emergency funds for banks

By John O'Donnell and Paul Carrel

The European Central Bank faces resistance from Germany to allowing any extra emergency lending for Greek banks, people familiar with the matter said, increasing pressure on Athens to sign up to an extended aid-for-reform program.

After talks between Greece and euro zone creditors broke down acrimoniously on Monday, the ECB's policymaking governing council will review on Wednesday how far the country may support its weak banks, which face rising deposit outflows.

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 nonetheless be bad news for Greek banks, which are close to using up the full 65 billion euros granted so far.

Bundesbank chief Jens Weidmann, who has warned against the misuse of the emergency funding to indirectly finance the Greek state, is set to stick to this stance at the ECB meeting, the sources said. Some other governors have similar reservations.

They are also determined to insist that Greek banks should not use ELA to increase their holdings of short-term Greek government treasury bills, since that would be tantamount to back-door illicit monetary financing of the state.

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A senior Greek banker told Reuters up to 500 million euros ($571 million) had been withdrawn from Greek bank accounts on both Thursday and Friday last week.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

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