Greek banks are shuttered today after the crisis took a traumatic turn that is rippling through global markets.
The government announced late yesterday it was shutting the banks to head off a deposit run that could cripple the lenders and paralyze the already depressed economy.
European stocks plunged today in the wake of the announcement and mounting fears over what happens next.
The bank shut-down and the capital controls that will follow – including strict limits on cash withdrawals and money transfers – came after the breakdown in talks between Greece and its creditors took the country a step closer to a full-blown economic and financial collapse that could see it crash out of the euro zone.
Combative Greek Finance Minister Yanis Varoufakis on Sunday called the escalated crisis “a dark hour for Europe.”
The decision to lock the bank doors was inevitable when, on Sunday afternoon, the European Central Bank (ECB) announced it would not boost the amount of emergency loans it was prepared to funnel into the banks to keep them operating at a normal pace. The funding freeze immediately triggered fears that the steady outflow of deposits would turn into a gusher on Monday, bleeding the banks dry.
They are not expected to reopen until after the national referendum on July 5, which was called on Friday by Greek Prime Minister Alexis Tsipras. The referendum will ask voters to accept or reject the latest bailout measures offered to the effectively bankrupt country by its creditors – the ECB, the European Union and the International Monetary Fund.
The government is urging Greeks to vote against the proposals, arguing they are humiliating and they would prolong the country’s financial woes.
The next crisis milestone will come on Tuesday, when Greece is expected to miss a €1.6-billion ($2.2-billion) debt payment to the IMF. If the IMF does not offer Greece a payment grace period, an official default could be declared, potentially leading to cascading defaults to other creditors, including the ECB, over the summer.
“The images of queues at ATMs in Greece are stripping traders of what little confidence they have left in the nation, and the financial earthquake that happened in the euro zone over the weekend can be felt around the world,” said IG market analyst David Madden.
“Of all the market selloffs we have witnessed due to Greece, this one is the worst in years, and traders who thought a Greek exit [from the euro zone] wasn’t on the cards are quickly reassessing their point of view.”
In a note published Sunday evening, the French bank Société Générale’s economics head Michala Marcussen said, “We now see a 40 per cent chance of Grexit” – the shorthand for Greece’s exit from the euro zone. But other economists and market strategists attached higher odds to Grexit. Nomura’s Jens Nordvig said the Grexit probability had risen “perhaps to above 50 per cent.”
Greece’s exit would mark the first country to leave the euro zone since the common currency was launched in 1999, making a lie of ECB President Mario Draghi’s claim that the euro was “irreversible” and humiliating German Chancellor Angela Merkel, who has been the main champion of the European integration project. The creditors and the euro zone leaders, including Ms. Merkel, insist they will still strive for a solution to keep Greece from dropping out of the euro zone, though time is running short and the lack of trust on both sides will ensure that any new negotiations will be difficult, perhaps impossible.
The chief executive officer of Piraeus Bank, Anthimos Thomopoulos, disclosed the decision on the bank closings to the media in Athens after the government’s financial stability panel met late on Sunday. The panel included the Governor of the Bank of Greece, Yannis Stournaras, who is thought to have lobbied hard for bank controls, and Mr. Varoufakis.
Earlier in the day, when Mr. Varoufakis evidently knew the bank shut-down was coming, he said that “the Greek government opposes the very concept” of capital controls because the monetary union was founded on the free flow of capital.
Mr. Tsipras later used a TV appearance to assure bank customers their deposits were safe even if they would not have full access to their cash. In a series of tweets, he called the rapid-fire events leading to the bank controls an “insult” to democracy. He blamed the ECB and other European institutions for using the controls to obstruct the referendum and “to stifle the will of the Greek people.”
The limits on cash withdrawals are expected to be €60 a day, a banking source in Athens said. The Athens stock exchange will also keep its doors shut on Monday.
The ECB’s decision to freeze the level of emergency loans to the Greek banks, instead of boosting the amount, immediately put the banks under enormous pressure. The loans had been used to replace the funds that were drained by nervous customers, who feared that the Greek crisis would destroy the banks, making it impossible for them to get their money out.
In a Sunday statement, the ECB said that its governing council “stands ready to reconsider its decision,” implying it could, at some point, boost the emergency liquidity assistance program or eliminate it if it were to decide the banks were insolvent, that is, beyond saving.
Two years ago, Cyprus imposed capital controls on its banks to prevent a debilitating bank run. They survived, but only after a painful restructuring. Their capital controls were only eased off earlier this year.
The Greek referendum was called at midnight on Friday and was condemned by the country’s creditors. They announced Saturday that they would not extend Greece’s current bailout program, which expires on June 30, the same day that Greece must make the payment to the IMF. The absence of the bailout program means it is highly unlikely that Greece will be able to pay the IMF.
But the decision by the ECB to freeze emergency liquidity assistance (ELA) at current levels, instead of withdrawing all support, signalled that it is gambling that Greeks will vote to approve the creditors’ latest bailout proposals even if Mr. Tsipras argues the new austerity measures will smother the economy.
“The ECB is keeping the door slightly ajar, but clearly believes Greece is on a very slippery slope toward an eventual exit from the euro zone,” Nicholas Spiro, managing director of London debt consultancy Spiro Sovereign Strategy, said in an interview. “The only thing keeping Greece in the single currency area right now is the persistent uncertainty about the financial and geopolitical consequences of Grexit.”
The Greek banks have relied on ELA since February, the month after Mr. Tsipras’s radical left, anti-austerity Syriza party swept into power. Since then, up to €89-billion of emergency loans have been approved by the ECB and made available to the banks.
On Saturday and Sunday, long lineups were spotted at ATMs throughout Greece. Hundreds of them were reported closed after running out of cash.
In the last week or so, the ECB has used emergency liquidity injections almost every day to replace fleeing deposits. The Bank of Greece announced on Thursday that deposits held by households and businesses fell to €129.9-billion in May from €133.7 billion a month earlier, implying a withdrawal rate of about €1-billion a week.
That rate accelerated as the odds of a Greek default and exit from the euro zone increase by the day.
ERIC REGULY – EUROPEAN BUREAU CHIEF
ROME — The Globe and Mail
Published Sunday, Jun. 28, 2015 6:17AM EDT
Last updated Monday, Jun. 29, 2015 9:01AM EDT