(Updates prices, adds comments, detail)
By Marius Zaharia
LONDON, Feb 5 (Reuters) - Borrowing rates in the euro zone’s weaker countries rose on Thursday after the European Central Bank said it would stop accepting Greek bonds in return for funding, shifting the burden onto the country’s central bank.
The move, which will take effect from Feb. 11, was a response to what many in Frankfurt see as the new Greek government’s abandonment of its bailout agreement and isolates Athens unless it strikes a new deal.
The Greek central bank will have to provide its banks with tens of billions of euros of additional Emergency Liquidity Assistance (ELA) in coming weeks, a step it takes at its own risk, ringfencing those banks’ funding problems from the rest of the euro zone.
The unexpected decision followed an appeal from Greece’s new Syriza-led government to the ECB to keep its banks afloat as it seeks to negotiate debt relied with its euro zone partners.
It is a blow for Greek Finance Minister Yanis Varoufakis, who is due to meet his German counterpart Wolfgang Schaeuble later on Thursday. A document prepared by Germany for a meeting of EU finance officials made clear Berlin wants Athens to go back on promises to raise the minimum wage, halt unpopular sales of national assets, rehire fired public sector workers and reinstate a Christmas bonus for poor pensioners.
Italian and Spanish 10-year government bond yields rose 4 basis points each to 1.59 percent and 1.47 percent, respectively.
“I can’t help thinking that the party that is going to have to make the most compromises to get a deal done are the Greek government, as I just do not see Mrs. Merkel doing anything other than playing hardball,” said Gary Jenkins, chief credit strategist at LNG Capital.
“However I didn’t expect the trigger to be pulled by the ECB so quickly.”
Ten-year German Bund yields fell 3 basis points to 0.34 percent as investors sought to protect their money by buying top-rated assets.
The moves were moderate as Greek banks still had access to the ELA.
“I think the contagion effect should remain very limited. This is not yet the end of the world for Greek banks,” said Patrick Jacq, rate strategist at BNP Paribas.
He said, however, that the liquidity situation for Greek banks might become “dangerous” if deposit outflows picked up. (Reporting by Marius Zaharia; Editing by Toby Chopra)