Mario Draghi, European Central Bank president

The eurozone’s monetary policy makers have tightened Greek lenders’ access to cheap liquidity, banning the use of the country’s debt as collateral for the European Central Bank’s cash weeks before a limit was expected to come into force.

The ECB’s governing council — composed of the heads of the eurozone’s national central banks and the top six officials on the central bank’s executive board, including Mario Draghi, the bank president — made the decision on Wednesday.

A waiver that allowed Greek government debt to be used as collateral despite its junk credit rating was set to expire on February 28, if the Syriza-led government carried out its threat to leave its EU bailout programme. The rules come into force when the ECB’s main liquidity auction next matures, on February 11.

The ECB said the early suspension was “in line with existing eurosystem rules, since it is currently not possible to assume a successful conclusion of the programme review”.

The ban also covers Greek government-guaranteed bank debt, an important source of collateral for the country’s lenders.

The early ban signals the ECB’s determination to take a tough line on Athens’ attempts to secure funding from the central bank for the three-month period between the exit of the bailout programme and the agreement of a new “contract” with eurozone leaders, which Yanis Varoufakis, Greece’s finance minister, hopes to have in place by the beginning of June.

The move follows a meeting between Mr Varoufakis and Mr Draghi in Frankfurt on Wednesday.

Responding to the decision late on Wednesday, the Greek finance ministry said the move would “put pressure on the EU to conclude a mutually beneficial agreement between Greece and its partners”.

The ECB announcement had an immediate effect on markets, with the euro falling 0.8 per cent to $1.1366 and US stocks giving up gains in the final minutes of trading.

Marc Chandler, global head of currency at Brown Brothers Harriman, said: “Now it looks like the ECB is playing hardball and markets see greater risk. Investors are thinking I better just take my profits and move to the sidelines and wait for a clearer picture.”

Volatility spiked after the announcement, with the CBOE’s VIX index, a measure of the expected moves in the S&P 500 over the coming month, rising as much as 5 per cent to 18.25.

Greek government debt can still be used to access emergency liquidity assistance, which is provided at the discretion of the Bank of Greece. The council also reviewed Greek lenders’ access to ELA at Wednesday’s meeting.

While the Bank of Greece could choose to continue to accept Greek government bonds under its ELA, there are ECB-imposed limits on the amount of some forms of sovereign debt that are eligible as collateral for the emergency loans.

The governing council next meets on February 18. The move to ban Greek government debt is likely to prompt speculation about whether the governing council could impose tougher measures at its next meeting. The council has the power to ban ELA, but needs a two-thirds majority for this.

The Greek government’s plans to fund itself through the three-month period partly through the issuance of short-term treasury bills could be curtailed by an ECB limit of €3.5bn on the amount of these bills that can be used in exchange for central bank cash.

Additional reporting by Eric Platt and Mamta Badkar in New York

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Letter in response to this report:

ECB has been trying to have it both ways / From Ray Kinsella

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