Greece imposed capital controls on Sunday night and announced it would keep its banks closed for several days in anticipation of an exit from the eurozone.
Prime Minister Alexis Tsipras assured Greeks their bank deposits were safe. But people have nevertheless taken billions out of their bank accounts in the last few weeks as it looked increasingly unlikely that Tsipras would do a deal with other European countries and the International Monetary Fund to stave off default.
The European Central Bank has provided up to €89 billion in emergency funding to Greece’s banks. In the absence of a political agreement to continue financial support, the bank said it would freeze the loans.
“This means the banks can no longer pay depositors who want to withdraw their money — but critically it means they do not go bust,” reports the Financial Times.
If the ECB were to cut off emergency loans entirely then a collapsed banking system would need to be reopened with a new currency — and Grexit would likely occur.
Talks to release the final €7.2 billion tranche of Greece’s €240 billion bailout collapsed in Brussels on Saturday after Tsipras had unexpectedly announced a referendum on the latest offer from his nation’s creditors overnight.
In a televised speech early on Saturday, Tsipras said he would respect whatever choice the Greek people made. But he also advised them to reject the bailout plan which he said would place “unbearable new burdens on the Greek people.”
Among the main sticking points were a proposed one-off 12 percent tax on corporate profits above €500,000 and a rise in employee pension contributions.
Other euro states and the IMF, which jointly administer Greece’s bailout program, rejected both Greek policy proposals, fearing they would push the economy even deeper into recession.
Greece returned to negative growth after Tsipras and his far-left Syriza party were voted into office in January on promises to end the austerity measures to which its bailout is tied.
Yanis Varoufakis, the Greek finance minister, insisted on Sunday that Greece would stay in the eurozone no matter what happens on Tuesday when a €1.5 billion loan from the IMF is due to be paid off.
But Varoufakis also said there would be no capital controls earlier this weekend.
Neither credit rating agencies nor the European Central Bank would consider nonpayment to the IMF a proper default. But it is unlikely the fund would agree to pay out the final tranche of Greece’s bailout if reneged on other loans.
Moreover, by the middle of next month, Greece needs to pay back the European Central Bank €3.5 billion. According to the Financial Times, “Defaulting on the ECB would almost certainly end all hopes of securing a new bailout and avoiding Grexit.”
Polls suggest that up to 80 percent of Greeks want to stay in the euro. But a majority also supports Tsipras and may very well reject the creditors’ latest bailout proposal if there is a referendum.
European officials have warned the Greeks countless times they cannot expect to continue receiving financial support and stay in euro if they tear up the agreements their previous governments made to qualify for aid.