ECB to keep tight funding grip on Greek banks after 'no' - sources

By John O'Donnell

FRANKFURT (Reuters) - The European Central Bank (ECB) is likely to maintain emergency funding for Greek banks at its current restricted level, people familiar with the matter said on Sunday, a move that will see lenders run out of cash soon.

There is little prospect of the ECB adopting a more generous stance after Greeks voted overwhelmingly to reject the terms of an international bailout meaning that the banks are likely to remain closed in the coming days.

The impending cash crunch belies Greek Prime Minister Alexis Tsipras's ambition to restore the banking system back to health after the 'no' vote.

Although a final decision has yet to be taken and the matter will be the subject of debate when ECB policy setters talk on Monday, they are seen keeping Emergency Liquidity Assistance (ELA) at its current level, leaving Greek banks, and in turn Athens, with little or no room for manoeuvre.

One person said in advance of Greece's rejection in a referendum of bailout terms that a 'no' vote would prompt no immediate action on the provision of funding but make any increase out of the question.

A second person confirmed that the referendum would not trigger a change. Greece's central bank will make an appeal for fresh funding, a central banking source said.

Maintaining the status quo would give Greek banks little time before they use up all of the roughly 89 billion euros of funding available and ensure that they remain closed for at least the coming days as cash runs dry.

Such an outcome jars with Tsipras's pledge on Twitter after the vote that "our immediate priority is to restore our banking system's functioning and economic stability".

NUCLEAR OPTION

On Friday, July 3, the head of Greece's banking association spelt out the urgency of the situation, saying that lenders had a "liquidity cushion" of 1 billion euros (0.71 billion pounds) but that funding beyond Monday depended on the ECB.

"We are coming to the end of the road," said a third person familiar with ECB thinking. "There is no appetite to lend any more. The banks cannot pay back what they owe."

Euro zone central bank chiefs and ECB President Mario Draghi's executive will likely avoid what some officials describe as the 'nuclear' option of withdrawing existing support, a measure that would trigger their immediate collapse.

The central bankers are also set to discuss increasing the haircut or discount imposed on the collateral Greek banks offer in return for funding.

It may, however, be a largely symbolic step to show that they are reacting to the situation, without substantially curbing banks' access to funds.

The funding pinch on Greek banks keeps pressure on Athens as Tspiras prepares for a meeting of euro zone leaders on Tuesday. As the economy runs out of cash, it risks the creation of an ad-hoc system of IOUs that would further damage the banks' solvency.

It was last week's decision by the ECB to freeze emergency funding that precipitated the closure of National Bank of Greece , Eurobank , Piraeus and Alpha Bank and the imposition of a 60-euro-a-day limit on cash withdrawals.

Greece's financial system has been at the heart of the current crisis, haemorrhaging deposits as relations between the radical left-wing government of Tsipras and its creditors worsened.

In theory, the ECB could demand that banks pay back the money they have lent it -- around 118 billion euros last month -- but the banks would not be able to do so and in seizing the collateral, the ECB would cause the system to collapse.

In practice the ECB is unlikely to take any action that would trigger the sudden demise of Greece's banks.

But if the ECB is to continue feeding Greece's banks with emergency loans then it may call on eurozone governments to guarantee Greek debt, something they would be reluctant to do.

The crisis will come to a head at the very latest on July 20, when Greece needs to repay about 3.6 billion euros in bonds owned by the ECB.

To deal with the banking crisis, the government could convert all the balances in the bank to a new currency but that would likely be at a much lower rate than the euro meaning that depositors would see their savings slashed.

(Reporting By John O'Donnell and Reuters bureaux; additional reporting by George Georgiopoulos in Athens. Editing by Carmel Crimmins)