The European Central Bank (ECB) has toughened its stance on Greece by banning access to its direct liquidity lines, forcing many investors back into safe-haven German bonds.

ECB’s decision Wednesday marks an escalation in the standoff between Greek politicians and other officials in the euro area, which are still on-going at the moment.

ECB Shuts Off Funding To Greece Via Debt Collateral

ECB strikes Greek bonds off its list

The ECB said in a statement late Wednesday that it was no longer able to assume there would be a successful conclusion to the Greek government’s bailout talks with its leaders. The ECB decided to strike Greek bonds off its list of accepted collateral.

ECB’s latest move would impact Bank of Greece as the central bank will have to provide Greek banks with billions of euros of emergency funding. In the event of the ECB Governing Council approving the decision, it would mark the eurozone central bank’s most serious response yet to Greece’s efforts to rewrite its aid-for-reform agreements. One famous macro expert noted that the move is meant to pressure Greece to “start negotiating seriously and does not push the country out of the euro”.

Reacting to the ECB’s latest announcement, the euro dropped and traded at $1.1339 down 1.2%, at 10:59 p.m. Frankfurt time.

In its statement Wednesday, the Frankfurt-based ECB said: “The ECB today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic. The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing Eurosystem rules”.

Impact of ECB’s decision

The ECB’s decision Wednesday will take effect from February. The decision would imply that the tens of billions of euros of Greek government bonds as well as bank bonds guaranteed by Athens will no longer qualify as security in return for ECB funding to those banks. That means Greece’s central bank will now be required to provide those banks with Emergency Liquidity Assistance (ELA), a step it takes at its own risk, ring-fencing those banks’ funding problems from the rest of the eurozone.

Since 2010, Greek lenders had been able to access funds from the ECB against junk-related collateral. While a similar shut-off occurred briefly in 2012, the government and its creditors are at odds this time on how to proceed, and the current move risks precipitating a Greek exit from the euro.

Greece’s new government has sought to overhaul the nation’s bailout program with European Institutions. Earlier Wednesday, Greek Prime Minister Alexis Tsipras met with European Commission President Jean-Claude Juncker and the president of the European Union’s parliament, Martin Schultz. Following the talks, Shultz indicated that both sides are fighting for mutual understanding and both had to find compromises in negotiations over Greece’s bailout program.

A couple of days back, a Goldman Sachs Group research analysis addressed the “adversarial” relationship between Greek Finance Minister Yanis Vaaroufakis and his unwillingness to submit to the authority of European “troika” of central bankers.

NOTE: this story is developing – stay tuned for the latest news.