The European Central Bank (ECB) is threatening to withdraw emergency funding from Greek banks if the Greek government doesn't do what it wants.

The central bank's actions toward Greece occur less than two months after secret letters revealed that the ECB threatened to pull emergency funding from Irish banks if the state did not apply for a bailout, in what many saw as an overreach into the sovereign affairs of the country. The ECB later pretended that Ireland had applied for its bailout voluntarily. The letters revealed that in fact the ECB had required the Irish government to apply.

It is one thing for the ECB to require individual banks to follow certain technical rules to maintain their liquidity. It is quite another for the ECB to pressure a government by threatening an entire nation's banks with a sudden default by yanking their liquidity en masse.

That's what is going on now with Greece.

The new Greek government, led by the left-wing Syriza party, is attempting to renegotiate the terms of its bailout deal with the so-called Troika. The Troika consists of the ECB, the European Commission, and the International Monetary Fund (IMF).

Syriza wants a shift in the focus of "structural reforms" toward increasing tax collection and government efficiency and away from crude budget cuts; a "European debt conference" to renegotiate the repayment terms on the country's debt (including linking interest payments to growth and writing down some of the debt); and a reduction in the government budget surplus the country is required to run.

The Troika wants to keep the current deal, which requires the Greek to run a budget surplus (with a target of a 4.5% surplus in 2016) and implement a programme of reforms to bring government debt down from its current 175% of GDP to 124% by 2020.

The country's access to the funding from the central bank that supports its banking system may be cut off at the end of the month unless a compromise is struck. This, at least, is the message coming from members of the ECB's governing board.

SyrizaAlkis Konstantinidis/ReutersHead of radical leftist Syriza party Alexis Tsipras after winning elections in Athens, Jan. 25.

Currently Greece enjoys special dispensation that allows its banks to use Greek government debt and government-guaranteed bank debt as collateral in exchange for funding from the central bank, despite being rated as "junk." This waiver was granted as part of a deal under which the country committed to undertake a package of structural reforms insisted upon by the Troika in exchange for bailout money.

Yet, as Bloomberg reports, ECB Vice President Vitor Constancio told an audience at a conference in Cambridge, England, last week that renegotiation of that deal could put the country's banks at risk. "There will be no surprises if we find out that a country is below that rating and there's no longer a program that that waiver disappears," he said.

If the waiver is withdrawn, then Greek banks will no longer be able to exchange the bonds on their balance sheet for ECB loans. Without that support, the sector could face widespread bankruptcies and could in turn push the country closer to collapse.

Read more: http://www.businessinsider.com/ecb-threats-greece-over-emergency-funding-2015-2#ixzz3QcglzsVK