By Balazs Koranyi and John O'Donnell
FRANKFURT (Reuters) - The European Central Bank could be forced by time constraints to delay a funding boost for Greek lenders, a key step toward their reopening, as it waits for Europe to agree a financial backstop that ensures Athens can repay its debts.
The bank had been ready to increase Emergency Liquidity Assistance (ELA) after Greece approved the bailout deal. But it wants first to ensure that temporary financing for the Greek budget is in place and Greece is able to repay a big debt to the ECB on July 20.
An emergency funding boost would have helped to 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.
The temporary 7 billion euro ($7.64 billion) loan, to be used to repay a 3.5 billion euro plus interest loan to the ECB, needs the approval of finance ministers from across the European Union, something that may not come in time before euro zone central bank chiefs break up their meeting in Frankfurt.
The ECB will announce its rate decision at 1145 GMT and Draghi will hold a press conference at 1230 GMT.
Uncertainty over Greece and persistent suggestions from Germany that it could leave the euro are set to dominate Draghi's regular news conference on Thursday as he weighs whether and when to give Greek banks some breathing room.
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 recapitalization.
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.
(Additional reporting by Francesco Canepa; Editing by Jeremy Gaunt)
