Greece on the Brink: Banks Closed, Loans Overdue, “Grexit” on the Way?

Few believed the euro crisis would ever go this far.

Greece is officially past due on a EUR 1.7 billion loan payment owed to the IMF. Another EUR3.5 billion is due to the European Central Bank (ECB) on 20 July. Public coffers are empty and outright default looks unavoidable.

A Greek exit from the Eurozone – “Grexit” – looks increasingly likely. Irish sports book Paddy Power is currently offering 5/2 odds that Greece will leave the currency union by the end of the year.

Athens Government Turns to Capital Controls

The euro fell to 1.40 against the pound sterling on Monday, its weakest level since 2007. Ratings agency Standard & Poor’s downgraded Greece’s sovereign debt rating to CCC-, labeling government bonds “junk.”

With investors refusing to provide credit to Greek banks, the country faces the dreaded “liquidity crunch,” a scenario in which banks lack the cash to cover consumer deposits and meet their own debt obligations.

Bank runs hit during the weekend, and on Monday the Greek government turned to the last weapon remaining in its arsenal: capital controls.

Banks have been ordered to close until after 5 July, money transfers are barred from leaving the country, and ATM withdrawals are capped at EUR 60 per.

This marks only the second time in the Eurozone’s 15-year history that a member country has applied capital controls within the currency bloc.

Referendum on Bailout Extension

Greece’s five-year bailout agreement with the “troika” (the IMF, ECB, and European Commission) expired late Tuesday, leaving the cash-strapped government without funds to meet a spate of pressing debt payments.

The left-wing Syriza government has announced a referendum on 5 July, one in which voters will decide whether to accept the troika’s offer of a bailout extension – as well as the terms that come with it. The troika issued a renewed list of conditions on 26 June.

Even if the Greek citizenry votes “Yes” to another bailout – allowing it to stay current on debt payments but only at the cost of further austerity measures – it will take the government time to implement the troika’s conditions sufficiently to receive bailout funds.

European leaders including French President Francois Hollande, German Vice-Chancellor Sigmar Gabriel, and EC President Jean-Claude Juncker have all suggested that a “no” vote would mean leaving the Eurozone, with Juncker commenting that “’no’ would mean that Greece is saying no to Europe.”

Syriza and its leader Prime Minister Alexis Tsipras are urging voters to reject the bailout while asserting that the country can remain inside the currency bloc.

Tsipras told a state-run TV station that “the greater the number of no [votes], the greater weapon the government will have to re-launch negotiations. Greece　never left the negotiating table; it is still at the negotiating table.”

Syriza is hoping that a strong anti-austerity message from the Greek public will spur European negotiators to grant concessions. And with the ruling party stumping hard for a no vote, Tsipras hinted that the government would step down if voters say yes to the bailout.

What a Grexit Would Look Like

The European Union Treaty contains no language regarding the expulsion of a member from either the union or the common currency area. Greece could, legally speaking, default on its debt and remain in both institutions.

But failure to pay could lead to de facto loss of the euro. The country’s financial sector is currently dependent on Emergency Liquidity Assistance (ELA), a program by which the ECB has provided EUR 89 billion in emergency credit to Greek banks.

Default would cut the country’s banking system off from ELA, making a liquidity crunch impossible to avoid. Bank holidays and capital controls would do little to stop euros from leaving the country. With few euros in circulation, the government would be forced to reissue its old currency, the drachma.

Standard & Poor’s warned that default would cause a “serious foreign currency shortage for the private and public sectors, potentially leading to the rationing of key imports such as fuel … banks would not be able to operate.”

While the process would take time to formalize, default and the loss of ECB support would make Grexit inevitable.

Athens Mayor George Kaminis, a proponent of the bailout, expressed optimism that the public would vote yes: “If it [the referendum] takes place, we are going to have a victory with yes.”

Joseph Larsen