ECB cancels soft treatment of Greek debt in warning to Athens

By John O'Donnell & Jan Strupczewski

The European Central Bank abruptly canceled its acceptance of Greek bonds in return for funding on Wednesday, shifting the burden onto Athens' central bank to finance its lenders and isolating Greece unless it strikes a new reform deal.

The move, which means the Greek central bank will have to provide its banks with tens of billions of euros of additional emergency liquidity in the coming weeks, was a response to what many in Frankfurt see as the Greek government's abandoning of its aid-for-reform program.

The decision came just hours after Greece's new finance minister, Yanis Varoufakis, emerged from a meeting with ECB President Mario Draghi to say the ECB would do "whatever it takes" to support member states such as Greece.

In stark contrast, the ECB move, which required the support of a majority of central bank chiefs across the eurozone, shows widespread dismay with the new Greek government's 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 Greece's 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 eurozone.

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...

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