Greece shuts banks and imposes capital controls as it teeters on brink of euro exit

Greece shut its banks and imposed capital controls in a dead-of-night announcement designed to avert the collapse of its financial system as the country edges closer to an exit from the euro.

The measures, which were announced just before 3am in Athens, limit daily cash withdrawals to €60 (Dh243) and ban payments and transfers abroad, according to the decree. Banks will be closed at least until July 6.

The move followed a weekend of turmoil that started with the prime minister Alexis Tsipras’ shock announcement late on Friday of a July 5 referendum on austerity measures demanded by the country’s creditors, sending people rushing to ATMs and gas stations. The poll would take place after the country’s bailout programme expires on June 30.

The risk of potential contagion if Greece leaves the euro spurred a 1.5 per cent fall in the currency against the US dollar on Monday and sparked declines in Asian stocks.

“If you were to put a gun to my head and say ‘give me a probability right now that Greece is in the euro zone in the next few weeks,’ I would tell you it’s 15 per cent,” said Mohamed El Erian, the chief economic adviser at Allianz. “There’s an 85 per cent probability it will be forced to leave the euro zone, not because it wants to do so but because it simply is no longer able to stay.”

The bank controls follow the breakdown of aid talks with international creditors late on Friday and a European Central Bank decision to freeze its lifeline to Greek banks. Greece is the second euro-zone country, after Cyprus in 2013, to impose capital controls.

“In the coming days, what’s needed is patience and composure,” Mr Tsipras said. “The bank deposits of the Greek people are fully secure. The same applies to the payment of wages and pensions – they are also guaranteed.”

The German chancellor Angela Merkel spoke to the US president Barack Obama on Sunday, agreeing on the importance of keeping Greece in the euro zone.

The weekend developments marked an abrupt turn from last week, when markets rallied on hopes a deal between Mr Tsipras’ anti-austerity government and its creditors – the ECB, European Commission and IMF – was at hand.

The optimism vanished after midnight on Friday with Mr Tsipras’ call for the referendum just days before the June 30 expiry of the bailout programme and a €1.5 billion payment due to the IMF. Greece also faces repayment of €3.5 billion euros of bonds held by the European Central Bank that mature on July 20.

The ECB on Sunday froze the ceiling on emergency liquidity assistance to Greek lenders at just below €89bn, refusing for the first time this year to maintain a buffer as deposits sank.

In Asian trading on Monday, the MSCI Asia Pacific Index lost 1.4 per cent at 10am in Hong Kong, its biggest intraday decline since April 30. The euro fell as low $1.0955, its weakest level since June 1 and biggest fall since late January.

“If they wanted a referendum, which by the way is a good way to go as it will show whether the Greeks want to stay in the euro or not, they could have easily done it a few weeks ago,” said Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors.

“By leaving it until after their IMF payment is due and their loan programme will lapse, they have just ensured maximum uncertainty and chaos.”

Adding to the confusion was uncertainty over the contents of the referendum, as there was no defined aid proposal. The European Commission on Sunday published a 10-point summary of what it said was the state of play when talks collapsed.

The list was published “in the interest of transparency and for the information of the Greek people” before the vote and included increases in value-added tax, cuts in pension spending and primary-surplus targets through 2018.

In the aftermath of the Brussels talks, Greeks lined up to get access to as much of their money as they could from ATMs. Skai television reported that as much as €1bn was withdrawn.

“When you close the banks for several days, you basically trigger an economic depression,” said Mr El Erian. “The government is going to have to issue IOUs and that’s going to become a parallel currency, so this is a tragic situation that is very difficult control on the ground.”

Mr Tsipras moved to bolster confidence and focus blame on Greece’s creditors, who have demanded continued austerity after extending €240bn in bailout commitments since 2010.

“The dignity of the Greek people in the face of blackmail and injustice will send a message of hope and pride to all of Europe,” he said, maintaining the confrontational tone that has characterised his six-month old government.

While Mr Tsipras and his government urged a no vote in the referendum, he repeated his request to the European Commission to extend the bailout at least until the ballot.

“A very dark day for Greece,” said Nicholas Economides, a professor at New York University’s Stern School of Business,. “The Greek economy, already at standstill, will go into a deep freeze.”

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