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May 16, 2012, 10.19 PM IST | Source: Reuters

ECB stops operations with some Greek banks: Sources

The European Central Bank has stopped providing liquidity to some Greek banks as they have not been successfully recapitalised, euro zone central bank sources said on Wednesday.

ECB stops operations with some Greek banks: Sources

The European Central Bank has stopped providing liquidity to some Greek banks as they have not been successfully recapitalised, euro zone central bank sources said on Wednesday.

The ECB declined to comment on the news, which sent the euro lower against the dollar. Concern is growing in Greece and among investors that the country may have leave the euro zone.

The development highlights the weak state of the banking sector in Greece, where Greeks are pulling euros out of the banks in fear that their country may leave the European single currency despite the declared determination of EU powers Germany and France to keep Athens in the monetary union.

"As recapitalisation wasn't in place, the ECB topped monetary policy operations," one of the sources said, declining to be identified. "They are now in the ELA of the Greek central bank."

The ECB only conducts its refinancing operations with solvent banks. Banks which fail to meet strict ECB rules but are deemed solvent by the national central bank (NCB) concerned can nonetheless go to their NCB for emergency liquidity assistance (ELA).

The sources did not name the banks concerned.

It was unclear exactly how many lenders were affected but the development marked a increase in the number of Greek banks depending on emergency borrowing from the Bank of Greece.

One person familiar with the matter said four Greek banks' capital was so depleted they were operating with negative equity capital. According to its own rules, the ECB cannot provide liquidity to banks in such a situation.

Another central bank source said the Greek banks concerned had been moved off the main ECB lending operations and onto ELA because the ECB felt that after Greece's inconclusive election the chance of a recapitalisation of those banks was evaporating.

If the recapitalisation comes and the capital ratios of those banks reach a certain level, then they would regain access to ECB normal lending operations, the source said.

Greece's cabinet on April 27 agreed a state bank support fund (HFSF) would provide the country's four big banks with 18 billion euros worth of European bonds as an interim solution until they are recapitalised later in the year.

Athens is working with EU/IMF officials on technical aspects of a recapitalisation plan for its banks, likely to be unveiled after the national election.

About 50 billion euros have been earmarked in Greece's second bailout to prop up its struggling banking sector.

The ECB said earlier on Wednesday it continued to support Greek banks.

"I want to state that our strong preference is that Greece will continue to stay in the euro zone," ECB President Mario Draghi said in a speech.

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