FRANKFURT/ATHENS (Reuters) - The European Central Bank could ease a funding squeeze on Greece this week, but it would first need Greek lawmakers to sign off on reforms and to be assured that payment due soon from Athens will be made, people familiar with the matter have said.
The hurdles are significant but with Greece's leftist government likely to harness cross party support for reforms, marking a u-turn after a 'no' vote to austerity, there is a prospect of gentler ECB treatment to inject fresh cash and let shuttered banks open.
Should parliamentarians in Athens vote on Wednesday to pass stringent laws, that could prompt Europe to agree temporary or 'bridge' finance for Greece, allowing it to clear a large debt to the ECB on Monday.
That, in turn, could free the ECB to pitch in too, by approving extra emergency central-bank funding for the first time in roughly three weeks, giving a small lift to Greece's flagging banks and the wider economy.
Two people with knowledge of the matter said an extension of so-called Emergency Liquidity Assistance (ELA) beyond its current 89 billion euro limit would be possible under these circumstances, when central banks chiefs and ECB President Mario Draghi's executive meet on Wednesday and Thursday.
In late June, it officially froze this aid, forcing the banks to shut and ration cash withdrawals to 60 euros a day.
Releasing the squeeze could allow them to open, giving a semblance of normality to the country's high streets, although officials expect banks would continue to limit withdrawals.
It would nonetheless allow the central bank in Athens to release cash that one official said was now held in its vaults for an emergency, via the banks into the economy.
Many in Athens hope a newfound willingness to reform and a resumption of debt payments to the International Monetary Fund, will help repair country's battered reputation in Frankfurt, home to the ECB.
"Banks could reopen on Thursday if the measures pass and there is more ELA, of course with capital controls in place," said one Greek banker. "Voting the bill of measures would be a very good start."
A small rise could help them open although it would be unlikely to give them enough breathing room to loosen capital controls much.
Frankfurt and Athens have been at loggerheads since February when Greece's then finance minister Yanis Varoufakis visited Draghi.
He emerged from that meeting to declare that the ECB head was ready to do 'whatever it takes' to help Greece, citing the words Draghi used some years earlier to underpin the euro at the height of the financial crisis.
Hours later, however, the ECB abruptly canceled its acceptance of Greek bonds in return for bank funding, forcing Athens' central bank to finance its lenders with emergency support.
More than two weeks ago, it officially demanded that this funding also be frozen, cutting off the supply of cash to the stricken country and putting it under intense pressure as it desperately sought to lighten reforms and cut its debt load.
Greece needs to borrow 7 billion euros ($7.7 billion) in July and another 5 billion in August to pay its obligations to the European Central Bank and the International Monetary Fund.
It has missed roughly 2 billion euros of payments to the IMF. It must pay the ECB 3.5 billion euros plus interest of roughly 700 million euros on July 20, one person familiar with the matter said.
Were it to default, it would make it difficult for the ECB to continue to approve emergency funding to its banks as it would be hard to argue that they were solvent and had a realistic chance of paying it back.
Athens is supposed to get financing through a new 86 billion euro bailout, but it will take at least four weeks before a deal on that is agreed.
European finance experts have been considering more than a dozen ways to provide such temporary financing. The executive European Commission will recommend using the EFSM -- a fund of 13.2 billion euros.
Additional reporting by Francesco Canepa and Balazs Koranyi in Frankfurt and Jan Strupczewski in Brussels; Writing By John O'Donnell; Editing by Giles Elgood