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A senior Greek banker told Reuters up to 500 million euros ($571 million) had been withdrawn from Greek bank accounts on both Thursday and Friday last week.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.
CAPITAL CONTROLS?
"The situation of the banks is getting more and more difficult every day," said a European official. "In the end, in order to safeguard the banking system, capital controls will probably have to be imposed."
It is not clear whether the ECB will issue any statement after Wednesday afternoon's meeting.
While they are loath to pull the plug on funding that is keeping Greece afloat, central bankers say allowing its banks to draw down more is equally problematic.
The ECB's chief economist Peter Praet has cautioned that the funding is for the short term only, although Austria's central bank chief Ewald Nowotny recently signaled that the ECB would resume direct funding if Athens struck a deal to extend its EU/IMF bailout.
Frustration with Greece is growing. Euro zone finance ministers have given Athens until the end of the week to request an extension or lose financial assistance when the bailout expires at the end of February.
Were the ECB to cancel all emergency funding for Greek banks, as it threatened to with Cyprus in 2013, it would leave Athens with no choice but to strike a new deal with its international backers or face bankruptcy.
But the ECB would be very reluctant to take such a step.
"Pulling the plug on Greece would have potentially catastrophic consequences," said Ashoka Mody, a former IMF official who helped design Ireland's bailout.
"The ECB's threats are completely empty. Despite all the bluster, it has no choice. The ECB has to ask itself how it can stabilize the financial system, not undermine it."
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