Tsipras gambles political future on Greek bailout referendum

29 Jun 2015 | Author: | No comments yet »

As Greece shuts banks, fears grow of Eurozone instability.

Three years after Mario Draghi pledged to do whatever it took to save the euro, the breakdown in the Greek rescue talks is calling into question the integrity of the entire currency union. As the Greek debt drama hurtles toward a nail-biting climax, fears are mounting that the outcome could sink not just Greece but the euro and the idea of the European Union itself.ATHENS — Greek leaders planned to shutter their banks on Monday amid last-ditch discussions about their nation’s economic future, as panicked citizens tried to pull their money from their accounts while they still were able.

Greek banks and the Athens stock market will be closed on Monday and capital controls will be imposed, Prime Minister Alexis Tsipras announced, pleading for calm after anxious citizens emptied ATMs in a dramatic escalation of the country’s debt crisis.Markets were poised for their worst period of turmoil since the height of the eurozone crisis four years ago, after Greece temporarily shut down its banks and suspend trading on its stock market, putting the country on the perilous path of a banking collapse and the issuance of a parallel currency. While Greece accounts for less than 2 per cent of the euro zone’s output, its exit would hurl the bloc into unknown territory by setting a precedent for other countries to reconsider their membership. Athens is dangerously close to bankruptcy after days of fruitless negotiations with international lenders over a new bailout package to keep it afloat.

Sunday’s decision to declare a bank holiday was a signal that Greece’s five-year battle to stay in the shared euro currency may swiftly be coming to an end. In a statement, Mr Tsipras early today (AEST) said the Bank of Greece had recommended a “bank holiday and restriction of bank withdrawals” after international creditors refused to extend the nation’s bailout beyond its June 30 expiry date, sparking default fears over an IMF loan repayment due the same day. The Greek government announced it would be imposing capital controls and enforced bank holidays following a drastic decision by the European Central Bank to freeze the life support it had been drip feeding banks for the last five months.

On Sunday night, Greek officials announced that Greece’s ailing banks would be closed Monday, and perhaps as long as a week, to prevent a further hemorrhage of cash from the financial system, after the pullout of billions of euros by worried depositors in recent weeks. ATMs in Athens were running out of money, and tensions were running high as Greeks stood in line for hours to scrape together petty cash for basic supplies. The euro tumbled by more than 1.5pc against the dollar in early Asian trading and futures markets pointed towards heavy falls on Wall Street on Monday as fears about a Greek financial collapse took hold. 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.

Urging calm, he assured Greeks their deposits, were “totally safe”. “Equally safe is the reimbursement of salaries and pensions,” he said. “Any difficulties that may arise must be dealt with with calmness. There were signs that Greece’s creditors — the International Monetary Fund and euro-zone governments — were leaving the door open to negotiations. Tsipras blamed the situation on Greece’s creditors for refusing to extend his country’s current bailout past its Tuesday deadline – the latest verbal volley in what has become a high-stakes game of chicken between Athens and fellow members of the 19-nation Eurozone. 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 cause them to change their minds. The Frankfurt-based ECB’s governing council earlier held a crisis telephone conference and pledged to maintain emergency liquidity assistance — keeping open its life-support for Greek banks and, by extension, the Greek state.

In such an event, the Greek economy would be thrown into chaos as the government imposed heavy capital controls, rushed to reintroduce the drachma and tried to placate angry citizens and businesses whose savings suddenly plummeted in value. The long festering crisis took a sharp turn for the worse on Friday night after months of deadlocked negotiations between the new hard-left government of Tsipras and the country’s creditors. Tsipras’s request to extend Greece’s aid program to allow the July 5 referendum to take place, and are instead making preparations to contain the fallout from a so-called Grexit.

European officials would be left scrambling as well, their immediate priority to prevent turmoil from spreading to other vulnerable Eurozone countries such as Italy and Portugal. The disagreements are about the extent of the painful reforms it must make to continue receiving the rescue funds that keep the nation’s finances afloat.

Even before the events of this weekend, German Finance Minister Wolfgang Schaeuble warned Friday of the harm an ineffective resolution to the crisis may do to the euro. But talks came to a sudden halt Saturday after Tsipras announced he would hold a referendum on July 5 to ask Greeks whether they would accede to the austerity demands of the nation’s creditors. For Mr Tsipras, austerity has been a “humanitarian catastrophe” for his country of about 11 million people, which has endured five years of recession, turmoil and skyrocketing unemployment. We destroy the monetary union.” Since its inception in 1999, the euro has climbed as high as $1.6038 (U.S.) in mid-2008 and fallen as low as 82.3 U.S. cents in late 2000.

President Obama has also weighed in: The White House said the president and German Chancellor Angela Merkel agreed in a phone call Sunday that “it was critically important to make every effort to return to a path that will allow Greece to resume reforms and growth within the Eurozone.” But European officials have also expressed exasperation with Tsipras’ government, which abruptly walked out of bailout talks in Brussels on Friday. French Prime Minister Manuel Valls warned of a “real risk” of Greece leaving the eurozone if it citizens vote against the EU’s bailout proposals in the referendum planned for next weekend.

The closure threatened to deal a grievous blow to Greek tourism, one of the few remaining supports to the country’s economy, as nations warned their citizens to bring extra cash to Greece if they planned to travel there. With events having spiralled out of control this weekend, Washington again intervened to urge Greece’s creditors to finally provide the country with some form of debt relief as part of any new rescue package. The single currency has proved remarkably resilient, too, amid the ebb and flow of the Greek bailout talks, climbing 2.6 per cent against its Group-of-10 peers since the end of March. Moreover, he and his left-wing Syriza party plan to urge voters to reject those proposals, denouncing them as a recipe for more hardship, especially for the poor and elderly, in an economy decimated by years of forced austerity. Treasury secretary Jack Lew echoed the IMF’s Christine Lagarde, saying it was “important for all parties to continue to work to reach a solution, including a discussion of potential debt relief for Greece.” The question of an alleviation of Greece’s 180pc debt mountain has been absent from the country’s current negotiations, with European creditors insisting it was a matter only to be addressed once Greece signs up to a package to cut spending and hike taxes.

The other 18 Eurozone nations quickly closed ranks, warning that they would not extend Greece’s current bailout package past its expiration Tuesday. Russia has been seeking to exploit the situation by dangling the prospect of aid to Greece while calling for a conciliatory approach toward its actions in the Ukrainian conflict.

Strategists give a variety of reasons for its strength, from money managers canceling euro hedges as they dump bonds and stocks to optimism Greece will pull through. Top Greek cabinet officials have expressed sympathy for Russian President Vladimir Putin, and in the E.U.’s consensus-driven decision-making system, even a single dissenting nation’s vote is enough to put an end to sanctions against Russia.

That optimism may soon be shown to have been misplaced. “If Greece leaves the euro, or even just defaults, then the uncertainty around the euro increases,” said Marshall Gittler, head of global currency strategy at IronFX Financial Services Ltd. in Limassol, Cyprus. “A solution to Greece would be bad for the currency, default would be worse and Grexit would be terrible.” In a measure of how much trust has broken down, European officials took the unusual step Sunday of releasing their bailout proposals to show that they had made some concessions and were prepared to address other Greek demands, such as debt relief, when Athens’ negotiators abruptly pulled out.

The ECB — which has maintained ultra-low interest rates and launched large-scale quantitative easing measures — said it “is determined to use all the instruments available within its mandate” to maintain price stability. For his part, Yanis Varoufakis, Greece’s outspoken finance minister, publicized remarks he made to his Eurozone counterparts at a closed-door meeting Saturday. He complained that the Greek government’s counterproposals were “never taken seriously,” and that “common ground was thus sacrificed in favor of imposing upon our government a humiliating retreat.” In many ways, Tsipras’ administration is caught in a bind of its own making. He swept to power after elections in January on the strength of campaign promises that many critics warned were irreconcilable. “They’ve developed a narrative of ‘We can have our cake and eat it. But with less than 48 hours before a default, IMF Managing Director Christine Lagarde on Sunday indicated that the organization remained willing to keep talking, keeping open a window of hope that a deal could be reached.

The introduction of capital controls could now harden Greeks against European authorities, pushing them towards a ‘No’ vote in next weekend’s referendum. Led by Germany, Greece’s creditors have shown virtually no willingness to deviate from their prescription of heavy public-spending cuts in exchange for bailout funds. “With one week of a referendum campaign, there’s plenty of scope for emotion rather than rational calculation,” he said. “A longer campaign, even two weeks, would allow for more consideration of all of the implications of what Greece is about to do.” Even if voters accepted the creditors’ proposals, another political crisis could ensue. It “would likely mark a first step towards Grexit as there is no indication that the Troika stands ready to offer Greece a better deal,” said Michala Marcussen of Societe Generale.

The euro is intended to serve as perhaps the most potent symbol of European amity and unity after a century of war and division; indeed, nations wishing to join the EU must commit to adopting the currency. Trust in the common currency could evaporate. “Clearly, once a country leaves a currency union, that currency union becomes to all intents and purposes an exchange-rate mechanism, not a currency union,” said Tilford of the Center for European Reform. “If they do force Greece out, there’s a very real risk of contagion at the next downturn.” “There’s really going to be a concerted attempt to portray this as one bad apple…that Greece leaving doesn’t tell us anything about the long-term success of the currency union,” Tilford said. “That’s going to be the narrative.

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