Exclusive: ECB stops operations with some Greek banks

(Reuters) - The European Central Bank has stopped providing liquidity to some Greek banks as they have not been successfully recapitalized, the ECB said on Wednesday, confirming news earlier reported exclusively by Reuters.

The news sent the euro lower against the dollar, fanning concerns among investors and in Greece that the country may have to 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 exit the European single currency despite the declared determination of EU powers Germany and France to keep Athens in the monetary union.

"As recapitalization wasn't in place, the ECB stopped monetary policy operations," a euro zone central bank source told Reuters, 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.

An ECB official later added: "Pending the recapitalization of Greek banks that are severely undercapitalized as a result of the recent PSI (debt restructuring) operation, some of the Greek banks have been moved to Emergency Liquidity Assistance."

"Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations," the official added. "The ECB/Eurosystem (of euro zone central banks) continues to support Greek banks."

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.

ECB policymaker Luc Coene told the Financial Times in an interview released earlier this week Greek banks on ELA were still solvent.

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 recapitalized later in the year.

The fund will allocate the 18 billion euros by next week to the country's four biggest lenders as an interim recapitalization, its chief said on Wednesday.

"Procedures to allocate the funds should be concluded by next week," the head of the Hellenic Financial Stability Fund (HFSF), Panagiotis Thomopoulos, told Reuters.

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

About 50 billion euros ($66 billion) have been earmarked in Greece's second bailout to prop up its struggling banking sector.

ECB President Mario Draghi said earlier the central bank wanted Greece to remain in the currency bloc.

"I want to state that our strong preference is that Greece will continue to stay in the euro zone," he said in a speech, adding: "Since the treaty does not foresee anything on exit (from euro), this is not a matter for the ECB to decide."

(Reporting by Annika Breidthardt and Andreas Framke; Writing by Paul Carrel; Editing by Noah Barkin/Jeremy Gaunt)