ECB eyes extra funding for Greek banks as Athens markets plunge

BY GEORGE GEORGIOPOULOS AND JOHN O'DONNELL

ATHENS/FRANKFURT Thu Oct 16, 2014 11:45am EDT

(Reuters) - The European Central Bank will loosen its terms for accepting security from Greek banks to allow them to tap more of its funding, offering the country's lenders support as stock and bond markets in Athens tumble.

This will provide a powerful incentive for Athens, which has toyed with the idea of quitting its financial aid program earlier than scheduled, to stay under the supervision of international lenders rather than attempt to go it alone.

Confirming an exclusive Reuters report, the ECB said it would apply a smaller discount when calculating the value of bonds that banks offer in return for ECB funding. This in effect allows lenders to tap more ECB money, despite the risks.

"The decision foresees that the current haircuts are lowered," said a spokesman for the ECB, insisting that the move had not been prompted by the recent market dip.

The offer stands only as long as Greece is under an aid program, which gives the country a financial safety net but also entails strict supervision.

The current "troika" of inspectors made up of the ECB, the European Commission and the International Monetary Fund is deeply unpopular in Greece.

Greek stocks and bonds have tumbled as investors take fright at Athens's plan to exit its international bailout more than a year ahead early and at the threat of early Greek elections next year.

In the last two days, shares have fallen more than 12 percent and the yield on Greece's benchmark 10-year bond GR10YT=TWEB has surged above 7 percent, a level where borrowing costs are widely as seen as unsustainable.

The slide continued on Thursday, with yields topping 9 percent and stocks falling. Banks have been among the hardest hit, with the banking index of the Athens bourse .FTATBNK down almost 17 percent this week.

Finance Minister Gikas Hardouvelis played down the market jitters, which could derail Greece's early bailout exit plan.

"I believe that we can make it," Hardouvelis told the Greek parliament. "If we stay calm, if we are focused on our targets, if we have the widest possible political consensus, we can exit the crisis a lot faster than expected."

"Those monitoring markets know that very often they are nervous, excessive in their reactions."

DRIP FEED

Fearing Greece could struggle if it were to quit its financial aid program early, the ECB made its offer on condition that Athens stay under its watch. The offer also applies to Cyprus.

Greek banks have reduced their borrowing from the ECB by 2 billion euros in the last month to 42.56 billion euros, but still depend on its funding for liquidity, which enables them to meet all their obligations.

The ECB offer, a type of 'reward' for Greece for its reform efforts, could provide relief.

The discount to face value normally reflects the credit quality of the assets offered as collateral, in this case usually junk-rated Greek government bonds or debt guaranteed by Athens. But the ECB would be more generous.

A Greek official said the new smaller discount meant that an extra 12 billion euros of liquidity could possibly be tapped by Greek banks.

While market pressures are intensifying, the political stakes are also high. Greek Prime Minister Antonis Samaras, a conservative, is hoping an early end to the unpopular bailout will revive his political fortunes.

So far, he lacks the support needed to push through his nominee in a presidential vote in February, which would trigger early elections. Recent opinion polls show those would be won by the leftist, anti-bailout Syriza party, further unnerving international investors.

They fear that without the constraints of an aid program, Europe will have less control over government policy and Greece could squander the progress it has made in curbing its budget deficit and ending a six-year-long recession.

Athens has said that it is in talks for a precautionary credit line from European countries, which would act as a form of safety net were it to quit the current bailout at the end of the year.

Greek officials have said they hoped to be able to avoid strict conditions being attached to that backstop, but it remains to be seen whether its European partners would accept that.

(Editing by Hugh Lawson)