ECB decision a setback for Greece
February 5, 2015, 5:02 am

Greek PM Alexis Tsipras now faces an even more difficult challenge to convince European financial leaders to agree to a restructuring of debt [Xinhua]

A few hours after a meeting between Greek Finance Minister Yanis Varoufakis and ECB chief Mario Draghi, the Central Bank announced that it had suspended a waiver given to Greek government bonds, rated as junk, to be used as collateral for regular loans.

A junk rating means that the government bonds are considered unsafe for investment; it usually discourages foreign direct investment in the battered Greek economy.

“The waiver allowed these instruments to be used in Eurosystem monetary policy operations despite the fact that they did not fulfill minimum credit rating requirements,” the ECB said in a statement released to the media on Wednesday.

A junk bond also falls below ECB standards (referred to as existing Eurosystem rules), which is why Greek government bonds had been issued a waiver after 2008.

Analysts agree that the ECB decision, effective February 11, indicates the Eurozone believes Greece is unlikely to meet its current repayment promises, indicating that a restructuring of Athens’ massive debt repayment scheme is growing more improbable.

Earlier, Varoufakis had reiterated his government’s “utter and unwavering determination that it can’t possibly be business as usual”, and that a new deal with the ECB and IMF was necessary.

European market analysts will be now looking to Thursday’s meeting between Varoufakis and his German counterpart Wolfgang Schaeuble, considered a hardliner against Greece’s restructuring plans, for signs whether Athens will back down.

The meeting in Berlin will likely be challenging for both parties which have in recent days indicated they will not back down.

Varoufakis is a member of the popular leftist Syriza party which swept into power after winning the January 25 snap elections.

The party’s platform centered around revisiting the merits of the current austerity agreements put in place after the EU and IMF agreed to provide a $300 billion bailout package.

Varoufakis told reporters on Wednesday that Greeks were suffering from current austerity measures and were facing a humanitarian crisis. If his government backs down from its election promises, it could set off a new political crisis in the country.

Financial woes

The Greek economy began to unravel in 2009 when the government announced it could not meet its huge debt due to massive overspending.

Its budget deficit began to surge shortly after government financed the 2004 Athens Olympics.

The debt crisis was further exacerbated when the global economic crisis hit and the government feared defaulting on its loans. It had no choice but to seek help from the EU and the IMF.

Although the EU and IMF agreed to a total of over $300 billion in bailout loans, they demanded that the Greek government take severe measures to cut spending.

Athens agreed but this measure was met with millions of Greeks taking to the streets in protest sometimes with violence reported between demonstrators and police.

Germany put its foot down

Germany has since 2008 been against bailing out the Greek economy and now may take an even tougher line.

On Wednesday, German Chancellor Angela Merkel said no decisions had been made and that the onus was on Greece to make “concrete proposals”.

When he arrives in Berlin today, Varoufakis will likely be told that Germany will not back down from demanding that Athens renege on its calls for a renegotiated debt scheme.

He will also likely face pressure to convince his government to pledge to honor the current debt repayment program – agreed to in 2008 – toward the ECB, the IMF, and the euro zone bailout regimen EFSF.

The BRICS Post with inputs from Agencies