The European Central Bank has refused to backstop a €140bn payment to Ukraine, dealing a blow to an EU plan to raise a “reparations loan” backed by frozen Russian assets.

The ECB concluded that the European Commission proposal violated its mandate, according to multiple officials, adding to Brussels’ difficulties in raising the giant loan against Russian central bank assets immobilised at Euroclear, the Belgian securities depository.

It comes amid pressure on the EU to finance Ukraine for the next two years, as Kyiv faces a cash crunch amid a renewed Russian military onslaught and a US peace initiative.

Under the European Commission plan, EU countries would provide state guarantees to ensure the repayment risk on the €140bn loan to Ukraine is shared.

But commission officials said the countries would not be able to raise the cash rapidly in an emergency, and this could put markets under pressure.

The officials asked the ECB whether it could act as a lender of last resort to Euroclear Bank, the lending arm of the Belgian institution, to avoid a liquidity crisis, according to four people briefed on the discussions.

ECB officials told the commission this was impossible, three of these people said.

The ECB’s internal analysis concluded that the commission proposal was equivalent to providing direct funding to governments, as the central bank would cover the financial obligations of member states.

This practice, called “monetary financing” by economists, is banned in EU treaties because of evidence it results in high inflation and loss of central bank credibility.

The ECB said “such a proposal is not under consideration as it would likely violate EU treaty law prohibiting monetary financing”.

Vir: Financial Times