Squeeze on Greece's funding

Greece's Prime Minister Alexis Tsipras. Photo / AP

Greece has lost a critical funding artery as the European Central Bank restricts loans to its financial system, raising pressure on the new government to yield to German-led austerity demands to stay in the eurozone.

The ECB's decision will raise financing costs for Greek banks and stiffen oversight by the central bank.

The next move is up to Prime Minister Alexis Tsipras, who swept to power promising to reverse five years of spending cuts that accompanied 240 billion of bailout loans.

The ECB move came hours before the Greek finance chief, Yanis Varoufakis, was due to meet Germany's Wolfgang Schaeuble in Berlin and hours after he met ECB President Mario Draghi.

"The Greek government has realised the handcuffs are a lot tighter than they expected," said Paresh Upadhyaya at Pioneer Investment Management in Boston.

The ECB hadn't publicly signalled that it would take such action so soon. Last month, the central bank said it would continue the waiver on the assumption that Greece would conclude a review of its current bailout programme, which expires this month, and negotiate another one.

A Bank of Greece spokesman said that liquidity will continue as normal, as existing ECB financing will be converted into Emergency Liquidity Assistance, or ELA.

ELA is priced at an annual interest rate of 1.55 per cent compared with the current ECB refinancing rate of 0.05 per cent.

The ECB also has the power to refuse permission for the Greek central bank to supply funds under ELA, and reviews the procedure every two weeks.

- Bloomberg