Greece Will Close Banks to Stem Flood of Withdrawals

28 Jun 2015 | Author: | No comments yet »

Greece crisis could be a Sarajevo moment for the eurozone.

LONDON European markets are braced for a wave of contagion from Greece on Monday, with heavy losses for southern European government bonds and regional stock markets expected as investors scramble to discount a possible “Grexit” that most had still assumed was unlikely as late as Friday afternoon. Prime Minister Alexis Tsipras has called a Cabinet meeting tonight, starting at 8 p.m., after a dramatic day which saw Greeks flocking to ATM machines to withdraw what money they could, fearing limits would be placed on banking transactions imminently.Greece is hurtling closer to a possible exit from the eurozone after Europe responded to the government’s call for a referendum by refusing to extend Athens’ desperately needed bailout. The referendum on bailout proposals by Greece’s creditors planned for July 5 was approved by the parliament late on Saturday night, with at least 179 deputies out of 300 voting in favour.

Greece’s European partners on Saturday shut the door to extending the existing credit lifeline beyond Tuesday night’s deadline, an extension that would have accommodated the planned July 5 referendum. The European Central Bank has left unchanged the amount of emergency liquidity available to Greek banks, putting further pressure on the system and heightening the chances of capital controls being imposed. Make no mistake, the decision by Alexis Tsipras to hold a referendum on the bailout terms being demanded of his country has the potential to be a Sarajevo moment.

The proposed referendum would ask Greeks to say “yes” or “no” to the measures submitted by creditors to Athens on Friday at one of the final rounds of negotiations ongoing on since late February. The Greek government is advocating a no vote in next Sunday’s referendum, saying the proposals were humiliating for Greece and would have pushed the country’s already devastated economy further into recession. Long queues formed at cash machines across Greece on Saturday, as fears mounted capital controls may be introduced as Athens looked all but certain to default on a huge IMF payment due on Tuesday. It said discussions had been ongoing with Greek authorities on Friday night on the proposals, and that any agreement would have “addressed future financing needs and the sustainability of the Greek debt.” It has been a longstanding demand of Tsipras’ government that creditors offer some sort of debt writedown or forgiveness, arguing the country’s debt is too big to be repaid.

Conspicuous by its absence so far from this year’s Greek drama has been contagion to other “peripheral” euro nations government bond markets as was the case during the last peak in Greek and euro tensions in 2012. Mr Tsipras announced the surprise referendum in the early hours of Saturday saying he had rejected a debt deal because it involved further austerity measures that would cause “humiliation” to the Greek people. Greek yields have soared, those of Italy, Spain and Portugal have not. “There is a risk that peripheral government bond spreads surge to stress levels,” wrote ABN Amro analysts in a research paper. “The ECB needs to be ready to activate its OMT (outright monetary transactions) program to restore calm if necessary.” Goldman Sachs said earlier this year that a Grexit could see Italian and Spanish 10-year bond premia over Germany almost trebling to as much as 400 basis points – a shock to all related European financial pricing although still some 200 basis points shy of peaks hit during the winter of 2011/12. Last week, Goldman said the euro could drop three full cents immediately after a Greek default but a further 7 big figures over the following weeks as the ECB stepped up its anti-contagion bond buying programs of OMT and quantitative easing.

He says “The Greek people’s proud ‘No’ will mark the continuation of negotiations to achieve a real and substantial solution and not an agreement that will recycle the problems.” The newspaper I Efimerida ton Syntakton published his comments Sunday. EU heavyweights Germany and France swiftly insisted Greece would remain inside the 19-country eurozone, even as fears grew about the future of the single currency itself. And it’s these possible anti-contagion measures that make trading bonds and stocks at least fraught with difficulty over the coming week – and not a simple one way bet on the shock. What’s more, the traditional safety of German government bonds in such a crisis has been challenged due to severe liquidity shocks in that market this year also.

The Greek vote next Sunday on approving creditors’ demands for Greece will be the country’s first referendum in 41 years — and the logistics of it are daunting. The return of a government headed by, for example, the centre-right New Democracy, would open up the possibility that Athens would sue for peace on the terms demanded by the troika. But he added that the refusal to grant his request to extend the bailout “will certainly damage the credibility for the Eurogroup as a democratic union and I am very much afraid the damage will be permanent”. The referendum that Parliament approved early Sunday sees citizens voting July 5 on two creditor proposals — one of which is a very technical debt sustainability analysis. Greece’s finance minister is suggesting that his country might not pay the 1.6 billion euros ($1.8 billion) it owes to the International Monetary Fund on Tuesday.

A week of intensive talks in Brussels ended with Greece’s creditors on Friday offering Athens a five-month, €12bn extension of its rescue program, on condition it committed to fresh reforms. Even though euro stock prices have held up remarkably well during recent weeks of twists and turns in Greece’s debt drama, European stock-market volatility has been propelled to six-month highs and knocked some 4 percent off European stocks since April .FTU3. “We are in uncharted territory and European equities, like all markets, will have a difficult time processing this,” said Deutsche Bank Managing Director Nick Lawson. “The market was not positioned for this going into the weekend and the lack of liquidity that has impacted both sovereign and corporate debt markets, as well as equity recently, will exacerbate things. In a sign of how volatile markets are expected to be when they re-open, FX broker FXPro said in a note on its website on Saturday that it may limit euro trading to the closing-out of existing positions, and may increase margin requirements on euro pairs “in order to reduce the risk of trading euro pairs”.

Varoufakis calls that idea “a very sensible transfer.” Asked directly, for the second time, whether Greece will pay up Tuesday, Varoufakis replies: “We are owed money by one part of the troika and we owe money to another part of the troika? Why don’t they sort themselves out and transfer money from one pocket … to the other?” The decision keeps a key financial lifeline open but does not provide further credit to Greece’s banks, which are seeing deposits drain away as anxious Greeks withdraw savings. The ECB said it was working closely with the Bank of Greece to maintain financial stability and added it could reconsider the decision on credit levels. Yanis Varoufakis, its finance minister, would not be drawn on whether capital controls will be in place by the start of business on Monday, but they are inevitable sooner or later to prevent Northern Rock-style queues outside the banks and – just as importantly – money leaving the country. Tsipras and Varoufakis say that this is not their wish or intention, but if the result of the referendum backs the government’s stance it is hard to see any alternative.

Cyprus stayed in the euro after introducing capital controls, but it was done with the approval of other single currency members and involved knuckling under to an austerity programme. Capping the aid would quickly force Greek banks to limit withdrawals — but such controls could take Greece a step closer to leaving the 19-nation eurozone.

It has suffered a slump of Great Depression proportions, yet the troika has been demanding fresh tax increases that will suck demand from the economy, stifle growth and add to Greece’s debt burden. In the poll by Alco for the Proto Thema Sunday paper, 57 percent said they believed Greece should make a deal with its EU partners while 29 percent wanted a rupture. This is what happens in the US or the UK, for example, with higher taxes in areas that are doing well being redistributed to areas with slower growth and higher unemployment.

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