Euro Chiefs Seek Damage Control as Greece Heads to Referendum

Updated on
Prime Minister Alexis Tsipras speaks in Athens
Alexis Tsipras, Greece's prime minister, stands and speaks to lawmakers inside the Greek parliament in Athens, Greece, on Sunday, June 28, 2015. Photographer: Kostas Tsironis/Bloomberg

European finance chiefs shelved efforts to rescue Greece, turning their focus to containing fallout from a looming financial collapse as Greek savers lined up at local banks and ATMs to pull out as many euros as they could.

The breakdown after a week of nonstop talks followed Prime Minister Alexis Tsipras’s surprise call for a July 5 referendum on spending cuts that he has steadfastly rejected. Greece’s parliament approved the plan in a vote in the early hours of Sunday after a fractious debate.

Meeting in Brussels Saturday evening after rejecting Greece’s request to extend its aid program beyond June 30, the finance ministers said the cash-strapped nation will need to take steps to protect its banks. The European Central Bank, which has kept the nation afloat, is set to discuss Sunday whether to pull the plug on its emergency lending, leaving the country with no backstop.

“Monday could be a bank holiday” in Greece, Ireland’s Michael Noonan told reporters. “It’s not a question of waiting to see what might happen on Monday in terms of crisis. The crisis has commenced.”

In Brussels, recriminations were replaced by wistfulness among the policy makers as the prospect of Greece’s exit from the euro after more than five years of crisis-fighting drew closer.

“Plan B is fast unraveling and becoming Plan A,” said Finland’s Alexander Stubb. The upshot is “potentially a very sad day.”

Sadness, Bafflement

“Sad day for Europe,” Greece’s Yanis Varoufakis said as he left his 18 counterparts to discuss damage control.

Around Greece, lines formed outside ATMs in an accelerating bank run that may require capital controls to husband the lenders’ dwindling resources.

Tsipras told the parliament in Athens that the referendum isn’t intended to mark a “rupture” with Europe, and said that extreme voices had prevailed among the country’s creditors. He said a sustainable agreement is still “on the table.”

The premier also invoked Franklin Delano Roosevelt, telling lawmakers that “the only thing the people of Greece have to fear, after so many years of pillaging, is fear itself.”

The main opposition party accused his government of dragging Greece out of the euro. The referendum was backed by 178 votes to 120, as the far-right Golden Dawn voted alongside the government in favor.

Public opinion is at odds with Tsipras, according to a survey published Saturday. Two-thirds say Greece should remain in the euro area and 57.5 percent say the government should back down to reach a deal with creditors, the Kapa Research poll for To Vima newspaper showed.

‘Acute Difficulties’

Jeroen Dijsselbloem, the Dutch finance minister and head of the meeting, told reporters in Brussels that Varoufakis had requested a one-month extension. With “no comprehensive package agreed” to by ministers, Dijsselbloem said the Greek government faces the expiry of its aid program on Tuesday night without any future financing in place.

In the coming days, “Greece will experience acute difficulties,” German Finance Minister Wolfgang Schaeuble told reporters in a briefing that ended with him shrugging his shoulders.

Even if that happens, the other 18 euro countries are in a better position to contain the damage than when the crisis initially spread from Greece in 2011 and 2012, several ministers said.

‘Clear Failures’

Varoufakis said that his government rejected the latest offer by creditors -- the European Commission, the ECB and the International Monetary Fund -- to unlock aid in return for more fiscal austerity because the package gave no hope that Greece would emerge from the economic crisis.

He said the measures, ranging from cuts in pensions to wage curbs, have been “quite clear failures” since Greece first sought aid in 2010, leading to twin bailouts worth 240 billion euros ($268 billion). Still, Varoufakis said, it’s possible that a majority of Greeks will vote in the referendum to accept the creditors’ plan.

It’s not clear, though, whether those proposals will still be on offer by then. IMF chief Christine Lagarde told the BBC late on Saturday that “legally speaking, the referendum will relate to proposals and arrangements that are no longer valid.”

Greece is due to make a payment to the IMF of about 1.5 billion euros on June 30. If that is missed, “Greece no longer has access to funding,” Lagarde said.

Bank Run

The ECB has increased Emergency Liquidity Assistance in weekly and sometimes daily increments to the Greek central bank to funnel to the country’s lenders amid a slow-motion bank run. The total stood at almost 89 billion euros as of Friday, up from less than 60 billion euros in February.

While any decision to rein in ELA requires a two-thirds majority in the 25-member Governing Council, that may not be hard to achieve should ECB chief Mario Draghi back it. He would already have weighty support from Germany’s Jens Weidmann.

The Bundesbank president said on Thursday that ELA for Greece raises “serious” concerns over monetary financing of governments, which is illegal under European Union law, as Greek banks regularly roll over about 9 billion euros of short-term government debt.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE