February 5, 2015 / 9:00 AM / 3 years ago

UPDATE 2-Bundesbank chief warns Greece against emergency funding for banks

* Warning follows move by ECB to tighten Greek bank financing

* Move shifts burden onto Athens central bank to finance lenders

* Bundesbank's Weidmann - emergency funding should be limited (Adds background, detail)

By Frank Siebelt

VENICE, Italy, Feb 5 (Reuters) - The head of Germany's powerful Bundesbank warned Greece against using emergency funding to prop up its banks long-term and said countries must bear the impact of their decisions, further isolating Athens after it all but ditched a reform-for-aid deal.

Jens Weidmann's remarks follow the European Central Bank's statement that it would no longer accept Greek government bonds as collateral for funding, shifting the burden onto Athens' central bank to finance its lenders.

The ECB's move means the Greek central bank will have to provide its banks with tens of billions of euros of additional emergency liquidity in the coming weeks.

However, Weidmann's remarks call into question Athens' freedom to use this emergency liquidity assistance (ELA). The ECB Governing Council can restrict such funding if a two-thirds majority agrees.

"ELA should only be awarded for the short term and to solvent banks," Weidmann, who also sits on the ECB's Governing Council of decision makers, told business daily Boersen Zeitung.

"As the banks and the state are closely bound in Greece, the economic and fiscal policy course that the Greek government follows plays an important role in this assessment," he added.

"Governments and parliaments must take decisions about whether and how to keep banks afloat, or wind them up."

Speaking later in Venice, Weidmann upped the ante, demanding that countries bear the consequences of their own fiscal decisions and warning that any move to bail out a euro zone peer could lead to the spread of solvency doubts.

Singling out Greece's refusal to cooperate with the troika of inspectors from international lenders, he said there could be no sharing of fiscal responsibility without first ceding sovereignty.

"Member states remain fully responsible for the consequences of their own autonomous fiscal decisions," Weidmann said in Venice.

"If market participants tend to see the monetary union as a system of mutual financial assistance in the event of serious trouble, doubts about a country's solvency could spread more quickly to the other member states."

Promising to end five years of austerity, Prime Minister Alexis Tsipras and his finance minister, Yanis Varoufakis, are meeting senior officials across Europe to seek support for a new debt agreement.

But their campaign this week was rejected by European paymaster Germany, which refused any roll-back of agreed austerity policies, and by the powerful ECB. (Writing by Paul Carrel and John O'Donnell; Editing by Sophie Walker)

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