ECB to Delay Greek Funding Boost as Europe Mulls Bridge Loan

The European Central Bank was set to hold emergency funding to Greek banks steady on Thursday, delaying an increase that would have allowed banks to partially reopen as it waits for European leaders to finalise a financial backstop.

The bank had been ready to increase Emergency Liquidity Assistance (ELA) after Athens approved the bailout deal but it first needs to ensure that Greece has the temporary financing to repay a 3.5 billion euro plus interest payment due to the ECB on Monday.

An emergency funding boost would have helped restore confidence after Greece was nearly forced from the euro -- a debate that challenged ECB President Mario Draghi's pledge that the currency was irreversible.

Comments from Greek Prime Minister Alexis Tsipras that he was forced to accept the deal also raised concern at the ECB, one source familiar with the discussion said, as it suggested that Athens may not be serious about carrying out its end of the deal.

A temporary 7 billion euro ($7.64 billion) loan has already been agreed in principle but technical details will take until Friday to iron out, indicating that the ECB's governing council may have to reconvene in a telephone conference.

The ECB was expected later to keep its key interest rates unchanged and record low after the bank already said rates have now hit their "lower bound".

Uncertainty over Greece, the longer term viability of the currency block and persistent suggestions from Germany that Greece could leave the euro are set to dominate Draghi's 1245 GMT news conference.

German Finance Minister Wolfgang Schaeuble has said a temporary exit from the euro is still an option for Greece and his government raised the idea that Athens could meet short-term domestic obligations with IOUs, a step many believe amounts to the same thing as a leaving the currency block.

Even once ELA is raised, banks are likely to open only with reduced operations and cash withdrawal limits at least until a bailout package is passed and banks receive at least some of the 25 billion euros earmarked for recapitalisation.

ELA has been held steady since late June, forcing banks to close and limiting cash withdrawals to 60 euros per day, disrupting an economy already in recession. It has shrunk by a quarter since the start of the country's troubles.

Still, a limited bank opening would create the impression of normality and allow the Greek central bank to release cash that one official said was now held in its vaults for an emergency, via the banks into the economy.

Nearly a third of economists polled by Reuters still expect Greece to eventually leave the euro and the International Monetary Fund said Athens needs far more debt relief than European governments have been willing to contemplate.

Though Germany ruled out a 'haircut' to this debt mountain, it said extending maturities was an option and the European Commission suggested 'very substantial re-profiling'. The IMF said Greece may need a 30-year grace period on servicing all its European debt, including new loans, and a dramatic maturity extension.

UPTURN?

"Were it not for Greece, the ECB would be enjoying a gradual, domestically-driven, QE-boosted Eurozone recovery while keeping a cautiously optimistic tone at its regular policy meeting on Thursday," Credit Agricole said in a note.

Indeed, lending data indicate that growth is gaining momentum with both business and household lending expected to increase in the third quarter, boosting growth and suggesting that the ECB's 60-billion-euro per month asset buying scheme was feeding through to the economy.

With risks ahead, the bank is expected to reaffirm its commitment to quantitative easing at least until September 2016 with the possibility of increasing the scheme.

Chinese market volatility will likely cause concern while commodity prices could lower inflation. ($1 = 0.9166 euros) (Additional reporting by Francesco Canepa; Editing by Jeremy Gaunt)