Greece is staggering deeper into the economic unknown, saying it will miss a payment to the International Monetary Fund today and preparing to exit the protection of Europe’s bailout regime at midnight.
As Greek Prime Minister Alexis Tsipras hardened his rhetoric, European leaders sought to break the deadlock by offering the same deal he rejected on Saturday. The government set new limits on pension payments as cash began running out and there were isolated reports of shoppers stocking up on medicine and baby formula.
Tsipras and his creditors are brawling amid a landscape transformed by his shock call for a July 5 referendum. While he labels it a vote on austerity, his counterparts in Berlin and Paris say it’s nothing less than a decision on whether to remain in the euro. The ballot may be rendered moot by an unpaid bill to the IMF; that could prompt the European Central Bank to withdraw its lifeline -- now frozen -- to the country.
“A ‘no’ in the referendum would make it almost impossible for the IMF and for Europe to provide support for Greece beyond what would de facto be humanitarian relief,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Greece would then have to issue IOUs as a first step to a Grexit.”
At stake, beyond the nation’s fate, is the credibility of the currency union conceived as the irreversible and crowning achievement of post-World War II integration. “If the euro fails, Europe fails,” German Chancellor Angela Merkel often says.
For now, at least, markets suggest investors are confident in policy makers’ efforts to quarantine Athens during more than five years of crisis fighting.
The euro is trading at about $1.12, stronger than before Tsipras’s referendum announcement and the breakdown of negotiations on June 26. Bond yields fell in Spain, Portugal and Italy, which sold 6.8 billion euros ($7.6 billion) of debt on Tuesday.
The most pressing question on Day Two of Greek capital controls was: how will the ECB respond to Greece becoming the first advanced economy to miss a payment to the IMF?
The central bank, which has pumped 89 billion euros of Emergency Liquidity Assistance into the country, hasn’t said how it would classify it or react. A spokesman declined to comment Monday. Policy makers would have to consider the effect of any missed payment on the solvency of Greek banks against the political consideration when they discuss the level of assistance on Wednesday.
The ECB’s decision on whether to provide ELA “will not be taken without political cover at the highest level,” Erik Nielsen, global chief economist at UniCredit SpA in London, said in a note.
Limited to 60 euros a day of withdrawals under the order issued at 3 a.m. on Monday, Greeks will find it impossible to resume life as before. For the poorest, it will be a struggle to survive. A mere 12 hours after issuing the capital-controls decree, the government revoked a provision that exempted pension payments from the caps.
The stress is beginning to show. Two pensioners came to blows on a bus returning from the beach to Athens Tuesday morning over who is to blame for the crisis. The driver stopped until the situation calmed. The employees’ union at National Bank of Greece SA appealed for a police presence in the next three days at all branches open for the payment of pensions.
In the capital’s Pangrati Square area, pharmacist Xenia Babou reported a “significant increase” in sales of medicines and milk powder. Outside his shop, Communist Party members handed out leaflets urging a ‘no’ vote in the referendum.
Tsipras is counting on voters’ anger after five years of austerity imposed in exchange for aid to strengthen his hand.
“The referendum will give us a stronger negotiating position when the talks resume,” he said in an interview with ERT TV. “The higher the participation and numbers of people voting ‘no,’ the stronger our position will be.”
A vote in favor would make the government’s position untenable and probably lead to early elections. That could produce new leadership more amenable to the demands of creditors.
The Greek Referendum Question
Alexis Tsipras has called a snap referendum for July 5 on the latest bailout package from creditors. The 68-word ballot question namechecks four international institutions and asks voters for their opinion on two highly technical documents that weren’t made public before the referendum call. Here is the question translated into English:
“Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on on June 25 and which consists of two documents:
‘‘The first document is called Reforms for the Completion of the Current Program and Beyond and the second document is called Preliminary Debt Sustainability Analysis.
‘‘- Those citizens who reject the institutions’ proposal vote Not Approved / NO
‘‘- Those citizens who accept the institutions’ proposal vote Approved / YES.’’
In Berlin, officials are preparing for the worst. While Merkel said she has seen no evidence that the bailout won’t end as scheduled, she said the door for talks remains open. Her finance minister, Wolfgang Schaeuble, told lawmakers that Greece would remain in the euro even if voters reject the austerity deal and that humanitarian aid may be available.
Neither Merkel nor French President Francois Hollande, the heads of the two biggest economies in the euro, have ceded an inch even as President Barack Obama intervened for a second day to urge compromise. European Commission head Jean-Claude Juncker said the “whole planet” would view a “no” vote as Greece turning its back on Europe.
Tsipras, for now, remains defiant.
“Is it possible for them to drive our banks to asphyxiation, to refuse an extension and for them to then expect us to pay the IMF?” he asked.
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