(Updates with moves in Greek bonds)
By Marius Zaharia
LONDON, Feb 5 (Reuters) - Greek government bond yields rose by up to three percentage points 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.
Borrowing rates in the euro zone’s weaker countries rose only moderately, suggesting investors were not worried that the ECB’s tough stance would prevent an eventual deal between Greece and its EU partners.
The ECB’s move, which will take effect from Feb. 11, was a response to what many in Frankfurt see as the Greek government’s abandonment of Greece’s 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.
Greek 10-year yields rose 95 basis points to 11.41 percent, while five-year yields were 226 bps up at 15.44 percent and the three-year yields jumped 320 bps to 19.82 percent.
“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.”
Greece’s main stocks index fell almost 7 percent, with the banking index dropping 16 percent.
The decision 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 4-5 basis points each to 1.59 percent and 1.48 percent.
“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 pick up.
Ten-year German Bund yields fell 3 basis points to 0.34 percent as investors sought top-rated assets.
The moves were moderate as Greek banks still had access to the ELA and investors continued to expect Athens to reach a new deal with the other European capitals.
“The risks attendant to failing to reach a compromise of some form are too high for both sides for a negative outcome to be the more likely scenario,” Rabobank strategists said in a note.
Reporting by Marius Zaharia; Editing by Dominic Evans