The financial crisis in Greece just took a huge turn for the worse. The country announced over the weekend it was closing the banking system for six days in order to keep currency in the country. It’s one of the worst signals a country could send about its financial health.
Jim Yardley had this story for The New York Times:
Prime Minister Alexis Tsipras announced Sunday night that Greece’s banks would be closed as of Monday, as the fallout from ruptured debt negotiations with the nation’s creditors began inflicting pain on ordinary people while raising alarm in Washington, Brussels and Berlin.
The emergency measures escalated the confused and unpredictable state of a crisis that some analysts say could ripple through global financial markets and undercut European unity. Most Asian markets opened lower on Monday.
With so much at stake, leaders in other capitals encouraged a continued search for a way to prevent Greece from being forced out of Europe’s currency union. Greece owes a large debt payment by the end of Tuesday, and has scheduled a referendum for next Sunday on whether to accept the terms of an offer from its creditors to release bailout aid it needs to meet its financial obligations.
Mr. Tsipras announced the emergency banking shutdown, which will also close the stock exchange, and imposed capital controls several hours after the European Central Bank said it would not expand an emergency loan program that had been propping up Greek banks for weeks. The banking system had neared insolvency after panicked account holders withdrew billions of euros, a pattern that continued over the weekend.
Writing for The Wall Street Journal, Brian Blackstone, Nektaria Stamouli, and Charles Forelle said that many cash machines had already been cleared:
On Athens’s rainy streets late Sunday, many ATMs had already been emptied. Prime Minister Alexis Tsipras’s announcement that he would call a referendum on the economic terms that Greece’s creditors want for fresh aid sent many Greeks scurrying to bank machines over the weekend to grab what remaining cash they could.
“How can something like this happen without prior warning?” asked Angeliki Psarianou, a 67-year-old retired public servant, who stood in the drizzle after arriving too late at one empty ATM in the Greek capital. “I want Tsipras to tell me how I am going to make it through the week with €10 in my bag with rent coming up. It has never been as bad as this.”
Withdrawals at bank machines will be limited to €60 ($66) a day for each account, a government official said.
Greece is now cast into extraordinary uncertainty. It isn’t clear what will happen Monday when Greeks face an extended period without their money. Nor is it certain whether Mr. Tsipras can survive, politically, after his referendum next Sunday.
Now that banks have been closed, it also isn’t clear how they will reopen or, when they do, what will be the currency in their vaults and in their accounts: If Greece can’t persuade the ECB to restart emergency lending, the only practicable solution is for Greece to print its own currency so that banks can satisfy depositors and still function.
The Washington Post reported in a story by Michael Birnbaum that the Greek prime minister called the decision to withhold aid “offensive“:
“The decision not to prolong financial aid to Greece is offensive, and it’s a disgrace for Europe in general,” Prime Minister Alexis Tsipras said in a brief Sunday evening address broadcast across Greek television networks. He said he was seeking an extended and enlarged bailout from European lenders that would carry the country past Tuesday, when it will otherwise face default.
There were signs that Greece’s creditors — the International Monetary Fund and euro-zone governments — were leaving the door open to negotiations. But it remained unclear ahead of Tuesday’s IMF repayment deadline how Greece would be able to satisfactorily arrange its finances.
Tsipras said that the threat by European Union leaders to hold Greece to the deadline and not extend further assistance amounts to “blackmail.” But he gave no concrete indications that he had made any concessions that would their minds.
The BBC’s Robert Peston said this might not mean a full exit from the Eurozone, but it’s not good:
So for banks to re-open, restrictions – known as capital controls – have to be put in place on the amount depositors can take out.
When these restrictions are announced, Greece will be half a step nearer to exit from the euro – since a core rule of the eurozone is that there should be no restrictions on the movement of money or capital.
But tumbling out of the euro would not be inevitable – as Cyprus shows: the Cypriot government introduced limits on how much cash could be taken out of banks in 2013, and has since taken steps to mend its finances while remaining in the euro.
The temporary closure of banks in Greece, and the expected introduction of capital controls, is however very bad news for Greece: Greek people will have less money to spend and business less to invest; so an already weak economy will probably return to deep recession.
As for the impact on the rest of the eurozone, corporate treasurers and wealthy individuals will wake up on Monday wondering if their money is safe in the banks of other weaker eurozone economies.
Monday should be more than a little interesting. The entire world is watching and waiting to see if bailout funds come from somewhere. But with the banking system closed and panic abounding, digging out of this is going to be incredibly difficult.
