Restructuring of sovereign debt in Greece would make it impossible for the European Central Bank to continue using its bonds as collateral in liquidity operations, Executive Board member Juergen Stark said.

Sovereign debt restructuring would undermine the eligibility of Greek government bonds, an ECB spokesman quoted Stark as having said during a visit to Greece on Wednesday.

A continuation of liquidity provision would be impossible.

The cost of insuring Greek debt against default rose after his comments were published.

Europe's top financial officials broke a taboo on Tuesday and acknowledged for the first time that Greece may have to restructure its debt.

The ECB holds up to 50 billion euros in Greek sovereign bonds on its own books and its policymakers from President Jean-Claude Trichet down have warned vehemently against a Greek restructuring, saying even a soft restructuring floated by EU policymakers would put the stability of the euro zone at risk.

Peripheral sovereigns continue to underperform as the ECB cements its opposition to any type of Greek debt restructuring, said Markit analyst Gavan Nolan.

The ECB accepts Greek and Irish government bonds as collateral in ECB liquidity operations regardless of their credit rating.

It accepts collateral at market value minus a predetermined haircut. Were Greece to restructure its debt, the market value would plummet and make its use as collateral difficult.

The ECB makes its own collateral rules independently and, if it so wishes, could accept voluntarily swapped bonds with extended maturities.

ECB Executive Board member Lorenzo Bini Smaghi said on Wednesday that even a soft restructuring of Greek debt would have devastating consequences. He slammed talk of a so-called soft restructuring of Greek debt as empty slogans.

Governing Council member Nout Wellink warned against a restructuring of Greece's debt, saying it could lead to a chain reaction affecting other European countries and banks. Greece must meet its obligations, he added.

Trichet has ruled out Greek restructuring, saying earlier this month that it was not in the cards.

German daily Financial Times Deutschland reported on Thursday that Trichet had warned EU ministers that the 17-country bloc's central bank would stop accepting Greek government bonds as collateral if the country were to ask investors for a voluntary extension of bond maturities.

Euro zone countries, together with the IMF, bailed out Greece and Ireland last year, and approved a new 78 billion euro rescue for Portugal on Monday.

(Reporting by Sakari Suoninen; editing by Mike Peacock)

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