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ECB Pulls The Trigger: Cancels soft treatment of Greek debt in warning to Athens

The European Central Bank on Wednesday said it would no longer accept junk-rated Greek government debt as collateral for regular central bank loans, dealing a major blow to the new governments attempts to rewrite the terms of its EUR240 billion bailout.

The announcement came as officials across Europe raised pressure on the far-left government to come to terms with international creditors on the countrys bailout program, and fanned fears that the divide between Athens and other European governments may be too wide to overcome.

According to Reuters, in stark contrast, the ECB move, which required the support of a majority of central bank chiefs across the euro zone, shows widespread dismay with the new Greek governments plans not only in Frankfurt but across the 19-country bloc.

The ECB announced its decision, which will take effect from Feb. 11, after those governors met in Frankfurt on Wednesday.

It means that the tens of billions of euros of Greek government bonds as well as bank bonds guaranteed by Athens will no longer qualify as security in return for ECB funding to those banks.

Instead, it will now be up to Greeces central bank to provide those banks with Emergency Liquidity Assistance (ELA), a step it takes at its own risk, ringfencing those banks funding problems from the rest of the euro zone.

Were the central bank to run into difficulties as a result, it would be up to the debt-strapped Greek government, which can ill afford it, to step in.

The unexpected ECB move followed an appeal from Greeces new leftist government to the ECB to keep its banks afloat as it seeks to negotiate debt relief with its euro zone partners.

The ECB has now effectively refused that request, adding to Greeces problems as Germany rejected any roll-back of agreed austerity policies.

The ECB move was a setback for Greeces Varoufakis, who had earlier pledged speedy talks with international lenders on setting up a new program of reform after abandoning its earlier aid plan.

It puts Greek banks in a difficult position. Two Greek banks had already begun to tap emergency liquidity assistance from the Bank of Greece after an outflow of deposits accelerated after the victory of the hard left Syriza party in a general election on Jan. 25, banking sources had told Reuters.

The health of Greeces big banks is central to keeping the country afloat.

The answer of Greek Finance Ministry

Greeces Finance Ministry said on Thursday the countrys banking system was fully shielded through its access to emergency liquidity assistance available from the domestic central bank.

The ministry also said the ECBs decision puts pressure on the Eurogroup to reach a deal that would be "mutually beneficial" for both Athens and its eurozone partners.

Under emergency liquidity assistance, the national central bank can lend to commercial banks, but borrowing from the domestic central banks ELA window against various types of collateral is more expensive than ECB funding.

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