* ECB’s Constancio - Greece will stay in euro, hints at default
* Nowotny says not possible to accept Greek security for funding
* Constancio says Greece must finish bailout programme first (Adds Constancio comments)
By John O‘Donnell and Georgina Prodhan
FRANKFURT, May 28 (Reuters) - European Central Bank policymakers played down the prospects of any immediate loosening of funding for cash-strapped Greece, saying that when it came to accepting the country’s bonds as security for central bank credit, the answer remained no.
Speaking to journalists in Frankfurt, the ECB’s vice president underlined the seriousness of the situation facing Greece, talking openly about a possible default, which would be the first of its kind in the 16-year-old currency bloc.
“Only when the final review of the ... programme will be completed and successful we, the Governing Council, can consider changing that. But not before,” Vitor Constancio told journalists, commenting on Greek banks tapping ECB funds.
His remarks echoed those made earlier by Ewald Nowotny, who as head of the Austrian central bank also sits on the ECB’s policy-setting Governing Council. Both counter the optimism of the Greek government that a deal is near.
“There is always a lot of noise in such a situation and I think the important point is to distinguish the noise from the facts,” Nowotny told CNBC television.
“For us, it is quite clear that we have certain conditions to be met. The one condition is ... whether we can accept for instance Greek assets, Greek bonds, as collateral. The answer is, for the time being: No,” said Nowotny.
In February, the European Central Bank abruptly cancelled its acceptance of Greek bonds in return for funding, shifting the burden onto Athens’ central bank to finance its lenders and isolating Greece unless it strikes a new reform deal.
The move, which means the Greek central bank provides banks with tens of billions of euros of emergency liquidity, was in response what many in Frankfurt saw as the Greek government’s abandoning of its aid-for-reform programme.
Constancio signalled that while Greece would not leave the euro, it could default.
“The end result is that a Greek exit will not happen,” he said, adding: “That’s not to exclude several things that are not nice that may happen.”
Commenting on the state of Greece’s banks in the event of default, he said: “They can sustain the impact of a big potential impairment in Greek public debt.”
He signalled that the ECB may also take a lenient view if this were to happen, a hint that they could still qualify for the emergency central bank funding that is keeping them afloat. This requires them to be solvent.
“There is no automatic connection between, say, a default of the Greek government and the insolvency of the Greek banks,” he said. (Additional reporting by Marc Jones in London; Editing by Hugh Lawson)