What you need to know about ECB’s Greek collateral decision

The European Central Bank just cranked up the pressure on Greece’s new antiausterity government as it attempts to renegotiate the terms of its bailout, telling Athens that Greek banks can no longer use the country’s sovereign debt as collateral for ECB-provided liquidity.

U.S. stocks fell in late trade after the headlines hit and the euro EURUSD, +0.19% extended a drop versus the U.S. dollar.

Here’s what you need to know:

What did the ECB just do?
The ECB’s Governing Council suspended a waiver that had allowed Greek banks to use the country’s junk-rated government bonds as collateral for central bank loans.

Why did the ECB do it?
Greek bonds are junk rated, thus the waiver was needed to allow the banks to post collateral that could be used for cheap funding from the ECB. One of the prerequisites for the waiver was that Greece remain in compliance with a bailout program.

In its decision, the ECB said it pulled the plug on the waiver because it can’t be sure that Greece’s attempts to secure a new program will be successful.

Beyond the official reasons, the move is seen as a definitive warning that, like Germany, the ECB is in no mood to give in to Athens’s request for a debt swap. News reports also indicated the ECB isn’t open to requests to allow Greece to raise short-term cash by issuing additional Treasury bills in an effort to keep the government funded as it attempts to reach a new deal with its creditors.

Where does that leave Greek banks?
It’s not a welcome development. Greek banks have suffered significant deposit withdrawals before and after the January election that brought the antiausterity government, led by Syriza’s Alexis Tsipras, to power.

“This news will likely scare depositors and result in further bank runs,” said Peter Boockvar, chief market analyst at the Lindsey Group in Fairfax, Va.

“This all said, if Greece can come to an agreement with the troika[ i.e., the International Monetary Fund, the European Commission and the ECB], I’m sure the ECB will reinstate the waiver,” Boockvar added.

While the kneejerk reaction in markets has been negative, analysts note that junk-rated Greek sovereign debt made up a relatively small portion of the collateral used by Greek banks in funding operations as of the end of last year. Karl Whelan, economics professor at University College Dublin, recently estimated that Greek banks were using a maximum of €8 billion in Greek government debt as collateral for loans from the Eurosystem as of December versus total loans of €56 billion.

Meanwhile, the ECB said Greek banks will be able to tap funds through a program known as emergency liquidity assistance, or ELA. Under the program, the loans are more expensive and remain on the books of Greece’s central bank rather than the ECB.