July 6, 2015 / 4:27 PM / 2 years ago

ECB keeps tight leash on Greece ahead of euro leaders' summit

FRANKFURT/ATHENS (Reuters) - The European Central Bank (ECB) kept a tight funding grip on Greece's banks on Monday in a move that will see the country's shuttered lenders run out of cash soon.

The measure ensures that Greek banks must stay closed for the time being and keeps pressure on Prime Minister Alexis Tsipras a day ahead of a meeting of euro zone leaders in Brussels where he needs to present a new reform plan to try and restart rescue talks for Greece.

The ECB also demanded a steeper haircut or discount on the collateral Greek banks offer in return for funding, a largely symbolic step that does not curb banks' access to funds but may serve as a warning to Athens that patience is running thin.

Greece's central bank had asked for more support from the ECB, according to a banking source, but that was rebuffed after Greeks voted overwhelmingly to reject the terms of an international bailout on Sunday, raising doubts about the future of Greece within the currency bloc.

Euro zone central bank chiefs and ECB President Mario Draghi's executive decided instead to keep so-called Emergency Liquidity Assistance (ELA) at its current level, leaving Greek banks, and in turn Athens, with little or no room for maneuver.

Maintaining the status quo gives Greek banks little time before they use up all of the roughly 89 billion euros of funding available and ensures that they will remain closed in the coming days as cash runs dry.

The government had initially pledged to reopen Greek banks on Tuesday but the head of the Greek banking association said they would stay closed on Tuesday and Wednesday.

The increase of the discount or haircut on some collateral used to tap funding was about 10 percent but a Greek banking source said its overall impact would be limited.

Greek banks have spare security to hand over, which means that the higher discount will simply require them to pledge more collateral but not reduce their use of current emergency funding, a person familiar with the matter said.

The ECB stopped short of what some officials describe as the 'nuclear' option of withdrawing existing support, a measure that would trigger their immediate collapse.

Greek banks were closed all last week after negotiations on an aid deal broke down.

Banks are struggling to keep their automated teller machine (ATM) networks fed with banknotes and dispense cash at the set daily withdrawal limit of 60 euros, gradually using up the remaining cash buffer in the system.

Editing by Carmel Crimmins

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