By ZEKE TURNER, MATTHEW KARNITSCHNIG AND HELEN POPPER
In 48 hours a sudden and violent breach with Athens takes EU into uncharted financial and political terrain.
Greece is hanging on in the euro, possibly the EU, by the thinnest of threads.
After a dramatic weekend of surprise midnight démarches, acrimonious summit meetings in Brussels and a heated parliamentary debate in Athens, the European debt crisis that began in Greece and spread across the Continent six years ago is fast approaching a climax whose immediate and further-reaching consequences are hard to foresee.
The rupture between Greece’s far-left rulers, who took power in February promising to end the economic austerity policies of previous governments, and the rest of the EU in the last 48 hours was violent and somewhat unexpected.
Absent a last-minute miracle, the outlook for Greece in coming days promises unprecedented financial and political turbulence: the capital controls and bank closures that the Greek government announced late on Sunday, the first-ever debt default by a eurozone country coming on Tuesday and eventually Greece’s possible departure from the single currency zone.
Further down the road, the inability of the EU to keep Greece in the euro club raises doubts about the viability of the 15-year-old single currency project. If Greece can’t stay in, why would southern Europe’s other weak economies? Greece is also a democratic beachhead for the EU and NATO in the Balkans, still an unstable region where Russia has recently sought to gain influence. This is why Chancellor Angela Merkel has for years led efforts to bail Greece out and EU leaders insisted even this weekend that a way would be found to keep it in the euro.
President Barack Obama called Merkel over the weekend, and his Treasury Secretary Jack Lew reached out to IMF chief Christine Lagarde, German Finance Minister Wolfgang Schäuble and French Finance Minister Michel Sapin about the crisis in Greece. The U.S., whose chief exposure is through the IMF, is warning Europe allies against letting Greece go, officials said. In his calls Lew urged the IMF and the Europeans “to continue to work to reach a solution, including a discussion of potential debt relief for Greece,” according to a Treasury spokesman.
The break-not-make week
Coming into this past week, the smart money was that a difficult compromise would be found, as it always was before, to unlock billions of euros to cover Greece’s debts. But several rounds of talks in Brussels failed. Greek Prime Minister Alexis Tsipras could barely hide his anger leaving a two-day summit of the European Council on Friday, expressing his frustration, as he has often done in recent months, in comments laced with pathos, about the EU’s “blackmail and ultimatums.”
The creditor group, which includes eurozone countries, the International Monetary Fund and the European Central Bank, has offered Athens a series of concessions but is still demanding deep cuts to pensions and other reforms the leftist government says it can’t accept.
Within hours, the Greeks went from negotiation to confrontation. In a final act of defiance to creditor demands early on Saturday morning, Tsipras announced his intention to call a referendum on billions in additional budget cuts and asked for an extension of its current bailout program.
Meeting later on Saturday, Eurogroup finance ministers promptly rejected his request, saying the referendum amounted to “unilaterally” breaking off talks on a new financial rescue package. The Greek parliament early Sunday morning called a referendum for July 5.
The economic and political die has mostly been cast before any Greek gets to a ballot box next month. The current bailout program expires on Tuesday. Without the final €7.2 billion tranche of bailout funds, Greece can’t pay €1.6 billion back to the IMF, due also this Tuesday — the first of a series of missed debt payments in coming weeks that will push Greece into default.
More importantly for Greece’s immediate finances, without a bailout program in place, the ECB has taken the first step toward cutting liquidity support to Greek banks, which totals almost €90 billion, and setting the stage for the financial sector’s collapse. After an emergency conference call on Sunday, the ECB governing board said it had decided to keep liquidity support at current levels but not expand it, despite the banks’ obviously pressing need for cash as Greeks rush to withdraw money from bank accounts.
After the ECB refused to ease the strain on the country’s financial system, Tsipras went on national television to announce that the Greek government had decided to impose capital controls and shut its banks Monday. Tsipras also said he had asked again for an extension of the bailout program that expires Tuesday.
The banks will stay closed until July 7 and withdrawals will be limited to €60 euros a day, according to Greek Finance Minister Yanis Varoufakis.
EU plans for Grexit
By Saturday afternoon, once the Eurogroup emergency summit broke up without a deal, the rest of the EU shifted its focus from trying to stave off a Greek bankruptcy to preparing for the fallout from their inability to do so. “It looks like we are heading for Grexit,” said a person who attended the meeting, who requested anonymity because Eurogroup meetings are private.
Anticipating the market reaction on Monday, Eurogroup officials emphasized that the eurozone was better prepared than ever to withstand this shock and portrayed Greece as a one-off case. Italy, Spain and Portugal are faring better economically. Much of Greece’s €320 billion debt is now held by EU states, the ECB and the IMF, largely neutralizing the threat that loomed so large five years ago to Europe’s banking system that had been the country’s main creditors.
“We are in a much stronger position than during the crisis,” said the statement on Saturday from 18 eurozone finance ministers, not including Varoufakis. “Euro-area member states intend to make full use of all the instruments available to preserve the integrity and stability of the euro area.”
‘Sad day for Europe’
At 5:13 p.m. on Saturday, as ministers were crafting their statement that blamed Athens for the breakdown, Varoufakis and the chief negotiator, Euclides Tsakalotos, left the room. The group had just denied Greece’s call for an extension on its bailout package
Walking out of the European Council building to board a minivan and head toward the airport, Varoufakis called it a “sad day for Europe.”
After a brief break, the Eurogroup resumed their meeting without Varoufakis on hand to discuss how to handle the economic and political fallout from this past week’s collapse, officials said.
“What are we looking at now? That in the next days Greece is going to be facing some very acute difficulties,” said Schäuble, the German finance minister, at the end of the day on Saturday.
“It’s a big disappointment for all of us, today is not a good day,” he continued. “But we’re ready to do everything necessary. Often after times of crisis, you come out ahead.”