FRANKFURT, Germany (AP) — The European Central Bank added pressure on the Greek government Wednesday by withdrawing a key borrowing option for the country's banks as it struggles to avoid defaulting on its debts and crashing out of the euro currency union.
The move underlines the key role the ECB, the monetary authority for the 19 countries that use the shared currency, is playing in the Greek drama.
The ECB said Greek banks could no longer access ECB credit by using Greek government bonds or bonds guaranteed by the government.
It had allowed the use of Greece's junk-rated bonds as collateral because the government was getting a financial lifeline through a bailout program that expires Feb. 28. The ECB said in a statement that prospects for a new deal appear uncertain. Greek banks could use other securities as collateral, but government bonds and government-guaranteed bonds play a big role in their ability to get the money they need to stay afloat.
Greece's new government has rejected the austerity conditions attached to the 240 billion euros in bailout loans from other eurozone governments and the International Monetary Fund, saying cutbacks have devastated the economy. It is seeking a new agreement to avoid default and possible departure from the shared euro currency. Creditor countries led by Germany, the eurozone's biggest member, have stressed that no write-off of Greece's debts is possible and that Greece should stick by earlier agreements to cut its deficits and remove regulations and bureaucracy that hurt growth.
Wednesday's ECB decision accelerates an already stressful timetable for Greece to sort out its financial problems by moving up disqualification of Greek bonds to Feb. 11, the last day Greek bonds can be used as collateral, instead of Feb. 28, when the old bailout deal was due to expire.
It puts pressure on the Greek government to reach a compromise with the so-called troika — the ECB, the European Commission and the International Monetary Fund. Greece is being pushed to enact structural reforms, such as selling off government-owned ports, airports and other assets to raise money to reduce government debt.
"This is clearly the ECB signaling to the Greek government: You're going to have to talk to the troika and get a deal," said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics. "Otherwise, really bad things are going to happen."
The ECB said Greek banks could access emergency loans provided by Greece's own central bank to replace the lost credit. Greek banks did just that while the country was going through a 2012 default. However, the replacement credit comes at higher interest rates and any default losses hit the Greek government directly.
Credit from the Greek central bank, called Emergency Liquidity Assistance, or ELA, also must be approved at regular intervals by the ECB.
The ECB's role is key because it has been supporting Greece's banks through its credit offering. A complete cutoff from the ECB, including a refusal of more ELA, could lead to a collapse of the banks. However, analysts say the central bank will be reluctant to make such a move unless politicians have exhausted all their options in finding agreement on resumption of aid to Greece or the government's request for easier terms on its bailout loans.
A banking collapse could leave the government with no other source of funds to rescue them, except for printing a new national currency. Economists say that if an overall solution to the country's financial problems is not found quickly, the banks could be threatened by withdrawal of deposits from fearful depositors and the economy will continue to deteriorate as investors shy away.
Greece's new government insisted it was not the target of the ECB pressure.
"By reaching and announcing this decision, the European Central Bank is exerting pressure on the Eurogroup to swiftly pursue a new and mutually beneficial agreement between Greece and its partners," a statement from the Greek Finance Ministry said.
Associated Press Business Writer Paul Wiseman in Washington, D.C. and Derek Gatopoulos in Athens, Greece contributed to this report.