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Greece shutters its banks after the ECB turns off the taps

A mixed message from a divided institution.A mixed message from a divided institution.
A mixed message from a divided institution.Photograph by Daniel Roland — AFP/Getty Images

Greece is shuttering its banks Monday and imposing capital controls after the European Central Bank refused to increase an emergency credit line to cover a stampede for cash by panicked savers.

The announcement places Greece on the brink of economic chaos and exit from the Eurozone, and brings the European Union a good step closer to a historic reversal of an integration process spanning over 60 years.

In the shorter term, it also threatens a fresh surge in global financial market volatility, as investors are forced to come to terms with the reality that the European Union doesn’t after all have the political will to keep its most important economic project together.

Addressing the nation on state TV, Prime Minister Alexis Tsipras said the country’s central bank had been forced into recommending the move after the ECB’s governing council decided earlier in the day it wouldn’t send any more euros to Greece to cover demand for cash from the banks. The ECB had been raising the credit ceiling on an almost daily basis in the last week. It currently stands at over €85 billion ($94 billion).

In a short and bitterly angry address, Tsipras railed against the “blackmail” and “injustice” of the creditors’ demands, which revolve around additional tax hikes and spending cuts along with other measures to prune Greece’s dysfunctional state apparatus.

He also repeated promises that he increasingly seems to be in no position to deliver.

Tsipras’ announcement capped a weekend of high drama that has seen long lines of Greeks at ATMs across the country, trying to pull their savings before they get redenominated in a new Greek currency, which many fear would instantly and sharply depreciate.

An estimated €1 billion was pulled from the banks on Saturday, and over a third of the country’s automated telling machines ran out of cash at one point, Reuters reported.

That was in response to a decision by Eurozone finance minister Saturday not to extend Greece’s bailout beyond Tuesday, effectively dooming it to default on a €1.5 billion payment to the International Monetary Fund.

Later Saturday, Greece’s parliament passed a government motion calling for a referendum next Sunday on the creditors’ last proposals–although it isn’t clear what the question will be. IMF managing director Christine Lagarde pointed out after Saturday’s meetings that the offer extended by the creditors last week will no longer be valid by Sunday anyway.

Ministers leaving the same meeting said that whatever happens after Sunday’s vote, a new agreement will have to be drafted from scratch.

The TV network Skai reported that the banks would stay closed until July 7, and that daily withdrawals would be limited to €60 ($67) in the meantime. There was no word on what controls would be imposed on electronic transfers.

Unless the stand-off is resolved in the next 48 hours, Greece’s government is likely to have to resort to using some other kind of currency, such as IOUs, to pay suppliers, employees and pensioners. However, what happens after that is still purely a matter of conjecture. Although the ECB’s rulebook does have some rules for handling a default, the E.U.’s treaty has no provisions for how to govern an exit from the Eurozone, short of a country leaving the E.U. itself.

For now, Greece remains a member of the Eurozone, and there is little that partner governments and the ECB can do to change that status. Capital controls per se aren’t enough to change that situation. They were imposed in Cyprus in 2013 as it slid into its bailout, but were gradually lifted as it government implemented the terms of its program and confidence returned to the banking system.

However, in contrast to the Cypriot government then, Greece’s is still openly defying its creditors and urging voters to do the same.

Over in Germany, which has led the hardline resistance to granting Greece debt relief for the last five years, Chancellor Angela Merkel has called a meeting of all the major parties’ leaderships for Monday to discuss how to proceed.

The German media has led the calls for Greece to leave the Eurozone if it can’t pay its debts. However, Merkel and most of the German political elite are desperate not to be seen as the ones responsible for causing the breakup’s of the E.U.’s most visible expression of integration and solidarity.

According to the website Der Spiegel, Merkel and President Barack Obama spoke by telephone on Sunday to discuss the situation. It said the two stressed the importance of keeping Greece in the Eurozone, and of the Greek government continuing its reforms.