Greece's new leftist finance minister clashed openly with his powerful German counterpart

(Reuters) - Greece's new leftist finance minister clashed openly with his powerful German counterpart on Thursday as Athens' borrowing costs leapt and bank shares plunged following the European Central Bank's decision to stop funding the country's lenders.

After blunt talks in Berlin, German Finance Minister Wolfgang Schaeuble said he had told Greece's Yanis Varoufakis it was not realistic to make electoral promises that burdened other countries, and they had "agreed to disagree".

A defiant Varoufakis, whose government was elected on a platform of scrapping austerity measures and negotiating a debt write-off, contradicted him at a joint news conference, saying: "We didn't even agree to disagree."

Schaueble said that while he respected the choice made by Greek voters, it was essential the new government stick to agreements reached with the European Union and work with the IMF, the ECB and the European Commission.

Prime Minister Alexis Tsipras' 10-day-old government has said it will not extend a bailout program due to expire at the end of this month and has refused to cooperate with the so-called troika of international lenders. It has also said it will reverse some unpopular measures insisted on by foreign creditors and halt some privatizations, raise the minimum wage, rehire fired public sector workers and restore a bonus for poor pensioners.

The ECB decision to stop accepting Greek bonds in return for funds shifts the burden onto Athens' central bank to finance its own banks in a big setback for the government's attempt to negotiate a new debt deal with its euro zone peers.

The Athens Stock Exchange FTSE Banks Index .FTATBNK plunged 22.6 percent at the opening before recovering somewhat. Three-year government borrowing costs leapt more than three percentage points to nearly 20 percent, leaving Greece utterly shut out of the lending markets.

Varoufakis said Athens proposed a bridging program until the end of May to allow time for debt talks, vowing that Greece would do everything in its power to avoid default. He said he had not discussed Greece's debt repayment schedule nor any possible "haircut" for official creditors with Schaeuble.

In Athens, a government official branded the ECB decision an act of coercion.

"Greece does not aim to blackmail anyone but will not be blackmailed either," the official said in a statement. "The ECB's decision ... is an act of political pressure to quickly reach a deal."

As pressure from EU partners mounted, Tsipras won a gesture of support from Russian President Vladimir Putin, at loggerheads with the West over Ukraine, who invited the Greek leader to Moscow on May 9 and discussed boosting coooperation in energy and theeconomy during a phone call.

 

NO ROLL-BACK

Varoufakis pleaded in vain with ECB President Mario Draghi on Wednesday to maintain normal funding for Greek banks over several months while Athens negotiates a debt deal.

In a policy paper circulated to EU officials and seen by Reuters, Germany said Greece had to stick to the terms of the 240 billion euro bailout negotiated by the previous government, and not roll back planned privatizations and cuts in the minimum wage, pensions and the public sector workforce.

Greek banks have been given approval to tap an additional 10 billion euros in emergency funding over an existing ceiling if necessary, the Greek official said.

Tsipras and Varoufakis have spent the week touring EU capitals trying to build support for a debt renegotiation and an easing of austerity measures. But they found scant backing in Paris, Rome, Frankfurt or Brussels even before Varoufakis's meeting with the hardline Schaeuble.

European Commission Vice President Valdis Dombrovskis said Athens must extend its current bailout program to gain time to negotiate a longer-term agreement.

"In the European Commission's assessment the most realistic way forward is to ... extend the duration of the program for another couple months or half a year," Dombrovskis told the Reuters Euro Zone Summit.

The ECB's tough action raised pressure on Athens to accept such an extension.

The new Greek leaders have had a cool reception even in left-leaning countries such asFrance and Italy which Athens had hoped would support its case for debt relief.

French President Francois Hollande told a news conference the ECB decision to restrict funding for Greece was legitimate, putting the onus on euro zone governments to hammer out a deal on the Greek debt crisis, and on Athens to present reforms.

 

EMERGENCY ROOM

Two Greek banks had already begun to tap the more costly emergency liquidity assistance from the Bank of Greece after an outflow of deposits accelerated following the victory of the hard left Syriza party in a Jan. 25 election, banking sources had told Reuters.

The health of Greece's big banks is central to keeping the country afloat.

Bundesbank chief Jens Weidmann said even emergency lending from the Bank of Greeceshould be a short-term measure. That credit line can be stopped if a two-thirds majority on the ECB Governing Council vote to do so although such a decision would likely lead to the collapse of Greece's financial system.

"ELA should only be awarded for the short term and to solvent banks," Weidmann told business daily Boersen Zeitung in an interview.

"As the banks and the state are closely bound in Greece, the economic and fiscal policy course that the Greek government follows plays an important role in this assessment," he said.

Speaking later in Venice, Weidmann demanded that countries bear the consequences of their own fiscal decisions and warned that any move to bail out a euro zone member could lead to the spread of doubts about solvency.

Tsipras, 40, won power promising to negotiate a debt write-off, reverse some key reforms and end budget cuts. At home, his poll ratings are high and the media is extolling his stance but if he fails to deliver, that may change.

 

(Writing by Mike Peacock and Paul Taylor; Editing by Peter MillershipGiles Elgood and Sophie Walker)

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