Athens - Greece is staggering deeper into the economic unknown, saying it will miss a payment to the International Monetary Fund on Tuesday and leaving the protection of Europe’s bailout regime at midnight.
Political battle lines hardened and financial prospects dimmed. Prime Minister Alexis Tsipras dared European leaders to throw his country out of the euro and US President Barack Obama intervened for a second day to urge compromise. With cash running out, the government set new limits on pension payments.
Tsipras and his creditors are brawling amid a landscape transformed by his shock call for a referendum on July 5. While he calls it a vote on austerity, his counterparts in Berlin and Paris say it’s nothing less than a decision to remain in the currency union. The ballot may be rendered moot if the European Central Bank withdraws its lifeline to the country’s financial system if Greece’s $1.7 billion bill to the IMF goes unpaid.
“The exit from the euro zone, which was a theoretical point, can unfortunately no longer be excluded,” ECB Executive Board member Benoit Coeure said in an interview with French newspaper Les Echos.
At stake, beyond the nation’s fate, is the credibility of a currency union conceived as the permanent and crowning achievement of Europe’s post-World War 2 integration. “If the euro fails, Europe fails,” German Chancellor Angela Merkel says often.
Quarantine
For now, at least, markets suggest investors are confident in policymakers’ efforts to quarantine Athens during more than five years of crisis fighting.
The euro strengthened on Monday, the first day of a bank holiday, and the MSCI World Index of stocks was little changed on Tuesday after slumping 2.2 percent on Monday. Bond yields in Spain, Portugal and Italy were little changed in early London trading.
The most pressing question on day two of capital controls was: how will the ECB respond to a missed payment to the IMF.
The central bank, which has pumped 89 billion euros ($100 billion) of Emergency Liquidity Assistance into the country, hasn’t said how it would classify or react. A spokesman declined to comment on Monday.
Even so, policymakers would have to consider the effect of any missed payment on the solvency of Greek banks when they discuss the level of assistance on Wednesday. They’ll also weigh the political implications.
‘Political cover’
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. Coeure said the central bank will maintain liquidity assistance for lenders “until further notice,” he told Les Echos.
“Essentially, what Coeure said is that the ECB doing whatever it takes to preserve the euro is no longer the same as doing whatever it takes to keep Greece inside the euro,” said Frederik Ducrozet, an economist at Credit Agricole SA in Paris.
On the streets, the referendum campaign heated up. An estimated 12 000 people gathered in Athens’ central Syntagma Square Monday night with banners that read “our lives do not belong to the creditors” and Tsipras declared on ERT TV that “they will not kick us out of the euro zone”.
‘Immense cost’
“The cost is immense,” the 40-year-old former Communist campaigner said. “The cost of bankruptcy by Greece, to which the ECB alone is exposed to the tune of more than 120 billion euros, is enormous and therefore they have no plan for Greece to leave the euro zone.”
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 the ERT TV interview. “The higher the participation and numbers of people voting ‘no,’ the stronger our position will be.”
A vote in favour, the likeliest outcome, would make the government’s position untenable and probably lead to early elections, which could produce new leadership more amenable to the demands of creditors.
Limited to 60 euros a day of withdrawals under the order issued at 3am 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.
‘Beyond belief’
With panic setting in, the Finance Ministry had to go on the record on Monday night to deny rumours that withdrawals soon will be cut to 20 euros a day. Tsipras said in the ERT TV interview that banks would re-open when the ECB restarts emergency lending, which could happen “a few hours” after the “powerful result” of the referendum.
“The Greek government’s behaviour has been beyond belief,” German Finance Minister Wolfgang Schaeuble said in an ARD television interview. Even so, “it won’t be able to destroy Europe”.
Neither German Chancellor Merkel nor French President Francois Hollande, the heads of the two biggest economies in the euro, have ceded an inch. 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 unfazed and as defiant as ever.
“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?” Tsipras said.
* With assistance from Paul Tugwell and Nikos Chrysoloras in Athens, Patrick Donahue and Arne Delfs in Berlin, Jeffrey Vögeli in Zurich, Celeste Perri in Amsterdam, James G. Neuger and Thomas Penny in Brussels, Justin Sink in Washington, Esteban Duarte in Madrid, Mark Deen in Paris, Jason Scott in Canberra and Enda Curran in Hong Kong
Bloomberg