ECB stops banks using Greek debt as loan collateral

The European Central Bank announced it was suspending a waiver allowing Greek banks to use government debt as collateral for loans. (AFP/Daniel Roland)

FRANKFURT: The European Central Bank on Wednesday (Feb 4) cut off Greek banks' access to a key source of much-needed cash, piling fresh pressure on the country's new government to reach a deal with international creditors.

In a decision that rattled financial markets, the ECB said it would no longer allow Greek banks to use government debt, which has a junk rating, as collateral for loans.

The Greek finance ministry was swift to insist that the country's banking system "remains adequately capitalised and fully protected", with other liquidity channels still available.

The ECB announcement came just hours after new Greek Finance Minister Yanis Varoufakis held his first talks with ECB chief Mario Draghi as part of his push to renegotiate his country's €240 billion (US$270 billion) EU-IMF bailout.

Stock markets fell on the news, while the euro tumbled by more than one per cent against the dollar.

The ECB move will likely feature heavily in Varoufakis's first talks on Thursday with German Finance Minister Wolfgang Schaeuble, whose country is seen as the strongest opponent of any easing in the terms of the massive debts Greece has built up.

Both Prime Minister Alexis Tsipras and Varoufakis - whose left-wing Syriza party stormed to victory in elections on Jan 25 - have been touring Europe in recent days to build support for a new debt agreement with creditors.

Elected on a pledge to end austerity policies imposed on Greece as part of its bailout, Tsipras faces the delicate task of persuading his European partners to reverse course while ensuring Athens still gets the aid required to avoid a default.

In Brussels, Tsipras struck an upbeat note after talks with European Commission chief Jean-Claude Juncker and EU president Donald Tusk, saying he was optimistic of a "viable and mutually acceptable solution".

A Greek government source said Tsipras and Juncker discussed plans to "jointly" create a four-year reform plan for Greece, as well as a bridging deal to give Athens time to draw up plans for reforms including on corruption and tax evasion.

But Tusk acknowledged that resolving the showdown over Greece's debt was likely to be "difficult" and needed "cooperation and dialogue as well as determined efforts by Greece".

'FRUITFUL' ECB TALKS

Ahead of the ECB talks in Frankfurt, Varoufakis told the German weekly Die Zeit that the ECB "should support our banks so that we can stay afloat", acknowledging that Greece was "a bankrupt country". The former economics professor later described his talks with Draghi as "very fruitful".

But after a meeting of its policy-setting governing council late Wednesday, the ECB said it was ending a special lending waiver for Greece because "it is currently not possible to assume a successful conclusion of the programme review".

The ECB waiver, which will end on Feb 11, had allowed banks to pledge their Greek bonds as collateral, even though the securities did not meet standards for a minimum credit rating.

Separately, a Financial Times report suggested that Draghi might block a key element of Athens' plan. According to the FT, which cited officials involved in the deliberations, the ECB is refusing to raise an agreed cap on the amount of short-term treasury bills that Athens can issue from €15 billion to €25 billion.

Greece faces key payments on its debt at the end of February and again at the end of May.

NEXT STOP: BERLIN

The International Monetary Fund - the third part of the so-called "troika" that oversees Greece's bailouts along with the European Commission and ECB - said meanwhile it was not in debt talks with the Greek government.

The new government has blamed its fiscal problems mainly on the austerity shackles fixed by Germany, and Varoufakis could face a testing time when he meets Schaeuble in Berlin on Thursday.

Athens says these restrictions have choked growth in an economy that has shrunk by a quarter, failed to cut unemployment that stands at over 25 per cent, and made it impossible to service a mountain of debt worth 1.75 times its annual economic output.

But German Chancellor Angela Merkel tried to squash talk that Syriza could play on divisions within Europe, insisting that there were no substantial differences between major eurozone nations. "I don't think that the positions of the member states of the eurozone with regard to Greece differ, at least in terms of substance," she said.

In a bid to quell Western worries over the new Greek government's closeness to Russia at a time of Cold War-style tensions, Varoufakis said meanwhile that Athens would "never" seek loans from Moscow.