ECB fires warning shot by refusing to accept Greek gov’t bonds as collateral

The European Central Bank turned up the pressure on the government on Wednesday by lifting a waiver on Greek government bonds, which means that they can no longer be used by local lenders as collateral to borrow from Frankfurt.

The ECB had adopted a special provision to accept junk-rated Greek bonds as collateral but a meeting of its governing council decided late last night that this should no longer remain in place as Athens does not look set to complete the bailout program, which is due to expire at the end of the month.

“The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing Eurosystem rules,” the central bank said in a statement.

This means that Greek banks would have to borrow through the more expensive Emergency Liquidity Assistance (ELA) program.

The decision came after talks between ECB President Mario Draghi and Finance Minister Yanis Varoufakis in Frankfurt.

The Greek government is hoping that by ensuring local lenders receive liquidity they will be able to buy the treasury bills Athens wants to issue to over the coming weeks. Greece also wants its lenders to raise the 15-billion-euro limit on T-bill issues but sources said that Varoufakis was told in Frankfurt that this would not possible.

“The president has clarified the ECB mandate and urged the new government to engage constructively and speedily with the Eurogroup to ensure continued financial stability,” an ECB source told Agence-France Presse.

“We outlined to him the main objective of this government, which is to reform Greece in a way that has never been tried before and with a determination that was always absent,” Varoufakis said after his session with Draghi.

“We also stated categorically that the debt-deflationary cycle in which Greece finds itself is detrimental to all efforts to reform Greece. He was good enough to explain to us his own constraints.”

Earlier in the day, Greece received the backing of French President Francois Hollande in its efforts to secure a new deal with the eurozone but the European Central Bank appeared reluctant to provide Athens with the funding it would need to reach such an agreement.

Prime Minister Alexis Tsipras met Hollande in Paris yesterday afternoon and the two men discussed the outline of what the new government is trying to achieve for more than half an hour.

Hollande said Europe should show more “solidarity” after the election of the SYRIZA-led coalition in Greece, which he said “underscored that austerity as the only perspective and reality wasn’t tolerable anymore.”

“But there is also respect for European rules, which are imposed on everyone  – France too – and it’s not always simple,” Hollande told reporters with Tsipras at his side. “And then respect for commitments that have been made in connection to debts related to states.”

Tsipras said he hopes that France will play a key role in reshaping economic policy within the eurozone.

“We need a new accord in Europe for the return of growth and social cohesion, and in this effort we certainly need France playing a role of guarantor, a protagonist for this political change,” said Tsipras.

Earlier on Wednesday Tsipras met European Commission President Jean-Claude Juncker and European Parliament President Martin Schulz in Brussels. According to sources, both European officials stressed that Greece must be bound by some kind of agreement if financial support is to continue, pointing toward the need for an extension to the bailout which ends on February 28.

Tsipras and Juncker embraced for the cameras, and the EC president jokingly held Tsipras’s hand as they walked off for talks. But there were no statements to reporters afterward. Tsipras also met with European Council President Donald Tusk and later with Schulz. In a joint press conference with Schulz, Tsipras said talks with European officials were progressing well and insisted that his government wanted to “recorrect this framework, not to smash this framework.”

According to sources close to Tsipras, the talks in Brussels went well and the premier had the chance to present his views while requesting an interim agreement with creditors to act as a bridge between the previous agreement with creditors and a new arrangement.

European officials, however, are keen for some kind of framework to be in place to ensure that ECB funding can continue from March 1.

Meanwhile, as Varoufakis prepares to meet his German peer Wolfgang Schaeuble in Berlin today, Reuters quoted an official document indicating that Germany wants the new Greek government to go back on pledges to revoke austerity measures. The document, which is said to have been prepared by German officials for a meeting of eurozone finance officials today, noted that the new administration must not roll back any cutbacks or reforms made by previous governments.

Greek government sources immediately rejected such a prospect.