By Simon Miller
The European Central Bank has stopped monetary policy operations with some Greek banks as they have not been successfully recapitalised according to sources.
According to euro zone central bank sources, banks had failed to recapitalise, breaking ECB conditions where it only conducts refinancing operations with solvent banks.
As a result, the banks will have to use the Bank of Greece's emergency liquidity assisitance facililty.
Although it was unclear how many banks were affected, one person familiar with the matter told Reuters that four Greek banks' capital were so depleted they were operating with negative equity capital. According to its own rules, the ECB cannot provide liquidity to banks in such a situation.
it is estimated that €1.2bn (£0.96bn) had left Greece in the first two days of this week and the ongoing uncertainty has led Bank of England governor Mervyn King to warn of a storm heading from the continent.
He commented: "We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history, and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution."
His warning was echoed by Prime Minister David Cameron who told the Commons at Prime Minister's Questions: ""The eurozone has to make a choice. If the eurozone wants to continue as it is, then it has got to build a proper firewall, it has got to take steps to secure the weakest members of the eurozone, or it's going to have to work out it has to go in a different direction.
"It either has to make up or it is looking at a potential break up. That is the choice they have to make, and it is a choice they cannot long put off."