Greece held fast to demands to roll back austerity as the European Central Bank turned up the heat before Finance Minister Yanis Varoufakis met one of his main antagonists, German counterpart Wolfgang Schaeuble.
The encounter at 12:30 p.m. in Berlin came hours after Greece lost a critical funding artery when the ECB restricted loans to its financial system. That raised pressure on the 10-day-old government to yield to German-led austerity demands to stay in the euro zone. Shares of Greek banks plummeted.
The government “remains unwavering in the goals of its social salvation program, approved by the vote of the Greek people,” according to a Finance Ministry statement issued overnight. It’s aim is “coming up with a European policy that will definitively put an end to the now self-perpetuating crisis of the Greek social economy.”
The next move is up to Prime Minister Alexis Tsipras, who swept to power promising to reverse five years of spending cuts that accompanied 240 billion euros ($272 billion) of bailout loans. While he’s retreated from demands for a debt writedown, he’s so far sticking to promises to increase pensions and wages that breach the conditions for financial aid.
Tsipras is scheduled to speak to his lawmakers in Athens about 2:30 p.m. as parliament convenes. German Chancellor Angela Merkel has also agreed to meet the Greek leader, French President Francois Hollande said Thursday.
Greek securities fell after the ECB statement. The benchmark stock index in Athens dropped 5.4 percent, led by losses in Attica Bank SA and Piraeus Bank SA. Yields on 10-year bonds rose as much as 61 basis points to 10.29 percent at 12:25 p.m. in Athens.
The ECB announced its decision to withdraw a waiver allowing banks to use Greece’s junk-rated debt as collateral at 9:36 p.m. Wednesday in Frankfurt. The ruling will raise financing costs for Greek banks and stiffen oversight by the central bank. Greece’s Finance Ministry said the decision doesn’t reflect any negative developments in the financial sector and that banks are “adequately capitalized and fully protected.”
The ECB hadn’t publicly signaled that it would take such action so soon.
On Jan. 8, the central bank said it would continue the waiver on the assumption that Greece would conclude a review of its current bailout program, which expires Feb. 28, and negotiate another one. But days after taking office, Varoufakis said he was willing to take his chances without a bailout deal because the demands to cut spending were too onerous and had damaged the economy too much.
The Greek government opted to “stop cooperating with the troika,” ECB Governing Council member Jens Weidmann said in a speech in Venice on Thursday.
A Bank of Greece spokesman said that liquidity will continue as normal, as existing ECB financing will be converted into Emergency Liquidity Assistance, or ELA. The official asked not to be named in line with policy and declined to answer all other questions.
ELA is priced at an annual interest rate of 1.55 percent compared with the current ECB refinancing rate of 0.05 percent, Bank of Greece Governor Yannis Stournaras said in an interview with Kathimerini newspaper in November.
“You have to keep in mind that the Greek banking system used the ELA very extensively in 2012,” Steven Englander, the global head of Group of 10 currency strategy at Citigroup Inc. in New York, said. “So it’s not going beyond break. It’s a warning signal that the patience isn’t infinite.”
The ECB also has the power to refuse permission for the Greek central bank to supply funds under ELA, and reviews the procedure every two weeks.
As Greece’s creditors line up to oppose the country’s demand for a debt restructuring and an end to austerity, Tsipras’s refusal to accept more bailout loans may result in a cash crunch as early as next month, two people familiar with the country’s financial position said.
“The Greek government has realized handcuffs are a lot tighter than they expected,” Paresh Upadhyaya, Boston-based director of currency strategy and portfolio manager at Pioneer Investment Management Inc., which oversees about $248 billion. The ECB’s message was “‘your predecessor signed on to the program and that’s why you got the assistance, you can’t just back away from that,’” he said.
Tsipras and Varoufakis will have visited seven European cities between them this week after their Syriza party won Jan. 25 elections on an anti-austerity platform. Their demands for overhauling the terms of Greece’s bailout package have been met with resistance and alarm in Berlin and Brussels.
The Varoufakis-Schaeuble meeting may yield clues to the compromise needed to maintain Greece’s financial lifeline. By the end of March, Tsipras may face existential choices: accepting a cash with conditions he has consistently rejected or abandoning the euro.
“The ECB’s decision is essentially a means of political pressure at a time when a substantial consultation is taking place at all levels,” Greek government spokesman Gabriel Sakellaridis said in a Mega TV interview on Thursday.