ECB might ease Greek restrictions if aid deal likely - source

By Marc Jones

LONDON (Reuters) - The European Central Bank might ease restrictions on how much short-term Greek government debt the country's banks can hold if becomes clear the euro zone will disburse long-awaited aid to Athens, a banking source said on Wednesday.

The ECB has kept up pressure on cash-strapped Greece in recent months by capping the amount of Treasury bills the country's banks are allowed to hold, effectively cutting off the government's main borrowing channel.

"The (T-bill) ceiling might be raised if there is a credible prospect of a (euro zone) disbursement," said a source who requested anonymity.

"If the 1.9 billion euros of SMP profits were released, that could be the signal," the source said, referring to money the ECB has made on Greek bonds it bought in 2010-11 as it tried to contain the escalating debt crisis.

The ECB said on Wednesday it had no comment on the possibility of raising the ceiling. But ECB board member Benoit Coeure said in an interview last week Greece could "relieve funding constraints" by securing aid and ultimately restoring bond market access.

If Greece did secure a new deal, its bonds would also automatically be eligible for the ECB to purchase from August through its 1 trillion-euro quantitative easing programme.

CARROT AND STICK

Although the potential changes are being dangled as a carrot for Athens to complete a deal, a large stick has also been waved in the background in recent weeks.

On Wednesday, the ECB opted for the first time since February not to raise the amount of emergency funding available to Greek banks. Lenders have been using that money to cope with withdrawals by savers and companies worried about their accounts being frozen.

Jens Weidmann, head of Germany's Bundesbank, has strongly criticised the emergency funding of Greek banks, particularly their use of the money to buy T-bills. He says that amounts to the ECB financing the country's government, which is strictly banned under the central bank's rules.

There have also been fears the ECB will raise the discount applied to the face value of assets like Greek bonds that the country's banks swap for central bank funding.

Some at the ECB feel it would have to increase the discount if Athens did miss a payment to the IMF or on the bonds the ECB itself still holds, 7 billion euros worth of which are due for repayment by August.

"If a payment" to the IMF or ECB "was missed you would have to acknowledge the increased credit risk," a separate central bank source said.

(Editing by Mike Peacock and Catherine Evans, Larry King)