The European Central Bank has refused to support a €140bn EU loan package intended for Ukraine, dealing a significant blow to a controversial initiative that sought to finance Kyiv using a cash pile from the investment of Russian frozen assets held in Europe.

According to Financial Times, the ECB has ruled that the European Commission's proposal conflicts with its legal mandate. Under the plan, EU countries would collectively guarantee a large sovereign loan to Ukraine, backed by future revenue generated from around €200bn in Russian central bank reserves held in Euroclear. However, the ECB concluded that the structure would amount to direct financing of governments — a violation of EU treaties.

“The proposed mechanism could be interpreted as direct monetary financing,” noted an internal ECB memo, as cited by FT. “Such an approach risks undermining the Bank’s credibility and could trigger inflationary concerns.”

The loan is already in trouble with member states refusing to vote the measure through in October thanks to Belgium’s stringent objections. Euroclear is based in Belgium and the government worries that if Russia wins the inevitable lawsuits, Belgium will be on the hook to repay the entire amount. Belgium’s Prime Minister Bart De Wever has insisted that the other EU members share the risk with Belgium, something the other European governments have refused to do, leaving Belgium to carry the can on its own.

As the prospects for an approval of the Reparation Loans fade, European Commission President Ursula von der Leyen has floated alternative plans for a bridge loan to keep Ukraine in the game until a more permanent solution can be found.

The issue of funding is key after the Trump administration withdrew all its financial support from Ukraine earlier this year. Since then the White House has sent no money to Ukraine at all, leaving the EU to take on the entire burden of financing Bankova. The International Monetary Fund (IMF) recently said it has underestimated Ukraine financial needs for 2026 and it will require an extra $65bn of funding. Economists have warned that Ukraine faces a macroeconomic collapse, and possibly as soon as February, unless a fresh source of funding is found.

The Commission had argued that the loan was necessary to ensure Ukraine's financial stability amid mounting war costs and fatigue among bilateral donors. Brussels had hoped the windfall income from immobilised Russian assets — estimated at around €3bn per year — could serve as a revenue stream to service the debt, which will ultimately be repaid by Ukraine if Russia agrees to pay war reparations.

However, the ECB also rejected the idea of serving as a lender of last resort for Euroclear. ECB officials reportedly feared that assuming such a role could expose the eurozone to unacceptable liquidity and legal risks.

“The Commission’s plan relies on sovereign guarantees from EU member states,” one source familiar with the talks told the Financial Times. “But the ECB analysis raised serious red flags about whether such guarantees could be quickly mobilised in an emergency without destabilising markets.”

The legal and institutional pushback reflects unease in parts of Europe over the consequences of appropriating frozen Russian reserves — a step without modern precedent in global finance.

On December 1, Belgian Foreign Minister Maxime Prévost openly questioned the plan, calling instead for a more conventional solution. “Europe would be better off abandoning the seizure of Russia's frozen assets and instead providing Ukraine with a classic pan-European loan,” he said. “EU countries are unwilling to assume responsibility for the risks that would arise following the confiscation.”

The Kremlin has been fuelling those fears, calling the idea of Reparation Loans “theft” and threatening “consequences” if the plan goes ahead. On November 27, Russian President Vladimir Putin warned of retaliation if the West pursued asset confiscation. “That would be theft,” he said, in response to a question from Vedomosti. “Such a decision would not go unanswered.”

Putin has ordered legislation to be drawn up that would seize Western-owned assets still in Russia worth more than $250bn. While these assets are privately-owned and so theoretically no subject for a quid pro quo seizure, Putin’s proposed legislation would by-pass these objections.

As the war in Ukraine drags on into its fourth year, the EU is under mounting pressure to come up with the cost of the war, which is running at over $100bn a year, according to estimates.

With the ECB ruling out support for the Reparation Loans, the Commission now faces the challenge convincing member states to use tax payers money to fund Kyiv -something that is universally unpopular amongst the increasingly cash strapped governments.

The situation is further complicated by the recent US 28-point peace plan (28PPP) as one of the points on the list calls for a creation of a joint US-Ukrainian reconstruction fund that will be seeded with $100bn of Russia’s frozen assets. The remaining money will be put in a joint US-Russia investment fund for commercial projects, thus removing the frozen assets from the table entirely. Brussels has rejected this idea and wants to keep control of the cash which is intends to use to pay fro Ukraine’s post-war reconstruction.