ATHENS -- Jittery investors dumped Greek shares Thursday after the European Central Bank tightened the screws on the country's banking system, piling pressure on the new anti-austerity government to seek a compromise with bailout creditors.
Shares on the volatile Athens stock exchange dived nearly 10 per cent on opening, but later recovered a bit and were trading about 6 per cent down. European markets also dropped, with the Euro Stoxx 50 index down 0.6 per cent.
In a surprise announcement late Wednesday, the ECB said it would stop lending to Greek banks using the nation's junk-rated government bonds as collateral. The ECB justified the move by saying prospects appear uncertain for a new deal between the radical left government in Athens and its international bailout creditors.
Greek banks retain access to emergency lending, but at a higher cost and subject to ECB approval.
Prime Minister Alexis Tsipras' 10-day-old government played down the impact on Greece's banking system and insisted that it would stick to its anti-austerity agenda. It said the ECB ruling put pressure on Athens and its creditors alike to strike a deal.
Tsipras' radical left Syriza party has pledged to seek forgiveness for most of Greece's debt pile, water down budgetary surplus targets Greece has committed to under its 240 billion euro bailout agreements, restore slashed minimum wages and rehire sacked civil servants.
Government spokesman Gavriil Sakellaridis said Greece is not using blackmail in its bid to win over bailout creditors -- its eurozone partners and the International Monetary Fund -- but "will not be blackmailed" either.
"Greece desires, and is determined to seek, a mutually beneficial solution," he told private Mega TV.
The ECB move came hours before talks in Berlin Thursday between Greek Finance Minister Yanis Varoufakis -- who is touring European capitals -- and his German colleague, Wolfgang Schaeuble. As well as being the biggest European contributor to Greece's nearly five-year-old bailout program, Germany is a staunch proponent of the strict fiscal discipline that led to deep income cuts in Greece, amid record-high unemployment and an economic depression.
Berenberg Bank analyst Christian Schulz said the ECB decision dealt a severe blow to Greece's negotiating position ahead of the talks in Berlin.
"Schaeuble is likely to highlight to Varoufakis that Greece cannot breach the conditions under which it received bail-out funds so far, which includes the labour reform and public sector lay-offs that Syriza now wants to reverse, and that there will be strings attached to any new money as well," he said in a note. "Greece can hope for some face-saving compromises and modest adjustments at best, but not for a wholesale renegotiation of the adjustment program."
Schulz said the decision provided a stark reminder that Greece's financial system and economy "could collapse within weeks" if Athens turns down the lifeline thrown to it by Europe.
"Instead of the ECB, the Bank of Greece and thus the Greek taxpayer will now be the lender of last resort for banks and the authorization (for) this can be removed by the ECB with a two-thirds majority at any time," he said.
A complete cutoff from the ECB, including a refusal of more emergency credit, could pull the plug on Greek banks, leaving the government with no other source of funds to rescue them except for printing a new national currency. However, analysts say the ECB will be reluctant to make such a move unless politicians have exhausted all their options for a compromise.
