FRANKFURT (AFP) - The European Central Bank on Wednesday cut off Greek banks' access to a key source of much-needed cash, piling fresh pressure on the country's new government to reach a deal with international creditors.
In a decision that rattled financial markets, the ECB said it would no longer allow Greek banks to use government debt, which has a junk rating, as collateral for loans.
The announcement came just hours after new Greek Finance Minister Yanis Varoufakis held his first talks with ECB chief Mario Draghi as part of the country's push to renegotiate Athens' 240-billion-euro (S$366 billion) EU-IMF bailout.
Stock markets fell on the news, while the euro tumbled by more than one per cent against the dollar.
The ECB move will likely feature heavily in Varoufakis's keenly-awaited first talks with German Finance Minister Wolfgang Schaeuble on Thursday, whose country is seen as the strongest opponent of any easing in the terms of the massive debts Greece has built up.
Both Prime Minister Alexis Tsipras and Varoufakis - whose far-left Syriza party stormed to victory in elections on January 25 - have been touring Europe in recent days to build support for a new debt agreement with creditors.
Elected on a pledge to end austerity policies imposed on Greece as part of its bailout, Tsipras faces the delicate task of convincing his European partners to reverse course while ensuring Athens still gets the aid required to avoid a default.
In Brussels, Tsipras struck an upbeat note after talks with European Commission chief Jean-Claude Juncker and EU president Donald Tusk, saying he was optimistic of a "viable and mutually acceptable solution".
A Greek government source said Tsipras and Juncker discussed plans to "jointly" create a four-year reform plan for Greece, as well as a bridging deal to give Athens time to draw up plans for reforms including on corruption and tax evasion.
But Tusk acknowledged that resolving the showdown over Greece's debt was likely to be "difficult" and needed "cooperation and dialogue as well as determined efforts by Greece."
Ahead of the ECB talks in Frankfurt, Varoufakis told the German weekly Die Zeit that the ECB "should support our banks so that we can stay afloat", acknowledging that Greece was "a bankrupt country".
The former economics professor later described his talks with Draghi as "very fruitful".
But after a meeting of its policy-setting governing council late Wednesday, the ECB said it was taking the step to end the special waiver for Greece because "it is currently not possible to assume a successful conclusion of the programme review".
The waiver, which will end on February 11, had allowed banks to pledge their Greek bonds as collateral, even though the securities did not meet standards for a minimum credit rating.
Separately, a Financial Times report suggested that Draghi might block a key element of Athens' plan.
According to the FT, which cited officials involved in the deliberations, the ECB is refusing to raise an agreed cap on the amount of short-term treasury bills that Athens can issue from 15 billion euros to 25 billion euros.
Greece faces key payments on its debt at the end of February and again at the end of May.
The International Monetary Fund - the third part of the so-called "troika" that oversees Greece's bailouts along with the European Commission and ECB - said meanwhile it was not in debt talks with the Greek government.
The new Greek government has blamed its fiscal problems mainly on the austerity shackles fixed by German Chancellor Angela Merkel.
Athens says these restrictions have choked growth in an economy that has shrunk by a quarter, failed to cut unemployment that stands at over 25 percent, and made it impossible to service a mountain of debt worth 1.75 times its annual economic output.
But Merkel tried to squash the talk that Syriza could play on divisions within Europe, insisting that there were no substantial differences between major eurozone nations.
"I don't think that the positions of the member states of the eurozone with regard to Greece differ, at least in terms of substance," Merkel said.
In a bid to quell western worries over the new Greek government's closeness to Russia at a time of Cold War-style tensions, Varoufakis said meanwhile that Athens would "never" seek loans from Moscow.
Greece's defence minister Panos Kammenos also told AFP that Athens remained committed to its NATO role despite its relationship with Russia.
Greece's political turmoil continued at home in the meantime, as judges sent 72 members of neo-Nazi party Golden Dawn, including its leaders, for trial for crimes including murder.