ECB move on Greek banks a warning shot

LONDON Thu May 17, 2012 9:50am EDT

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LONDON (Reuters) - The European Central Bank's move to stop providing liquidity to some Greek banks is a warning for other countries to take the steps needed to get their banking systems in order, analysts say.

The ECB confirmed on Wednesday that some severely undercapitalized Greek banks could no longer fund themselves at the euro zone central bank and had moved to Emergency Liquidity Assistance (ELA) funded by the national Bank of Greece.

"The ECB is now shielding itself much more than was previously the case. They won't destroy their balance sheet for a single country - their actions underpin that," "said Commerzbank rate strategist David Schnautz.

"The ECB is playing hardball with Greek banks ... we may also see undercapitalized banks in Spain where you can't take it for granted that the ECB will grant access to all Spanish banks, no matter what."

Spain has stepped up efforts to soothe concerns over its banking sector, ordering lenders to set aside 30 billion euros in addition to the 54 billion euros ordered in February to provision against losses on loans which are still performing as well as against bad ones.

But the government's takeover of Bankia has rattled markets. The bank's shares fell 20 percent on Thursday after a news paper report - denied by Spain's economy secretary - that its customers had withdrawn more than 1 billion euros from their accounts over the last week.

The prospect of yet more state liabilities accruing from the Spanish banking system due to bad loans from a burst property bubble is weighing heavily on Spanish government bond yields.

"The ECB is now intent to ... actively put pressure on some institutions, and particularly on political leaders to step up to the plate," said James Nixon, chief European economist at Societe Generale.

"The bigger game is the ECB feels euro zone leaders haven't done enough to increase the size of the stability mechanism and there's reluctance to use those official channels. The ECB are basically going to force them to do that."

The ECB's most recent weekly financial statement showed 11 billion euros of longer-term low-cost funding had been repaid to it before maturity - an unusual move, and only possible if a bank loses its eligibility as a counterparty or falls short of collateral to post against what it has borrowed.

Weekly borrowing in the same period also fell by around 12 billion euros, with the corresponding entry accounting for emergency loans rising almost 20 billion euros, suggesting a link to Greek banks losing access to ECB funding.

Spain's banks have borrowed over 300 billion euros from the ECB, almost a third of its outstanding financing operations.

Greece's bank support fund will allocate 18 billion euros by next week to the country's four biggest lenders - National Bank, Alpha, Eurobank and Piraeus - as an interim recapitalization after huge bond swap writedowns to cut the country's debt nearly wiped out their capital bases.

Meanwhile, as the effects fade of the ECB's injection of nearly one trillion euros of cash into the banking system, key euro zone three-month bank-to-bank lending rates edged higher on Thursday - the first rise seen since the two three-year financing operations kicked off in December.

(Editing by Catherine Evans)

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