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| Greeks queue to withdraw cash from ATM machines Credit: Reuters |
Greece's Prime Minister Alexis Tsipras has insisted on calling a referendum on the bailout offer. Credit: Reuters
The European Central Bank is meeting about now to make what may be the decisive move in the intensifying Greek crisis.
The ECB is the lender-of-last-resort for Greek banks and has been supplying them with billions of euros to replace the cash which account holders have been withdrawing at a gathering pace. Customers have
two worries: that their bank will run out of cash and that if Greece is forced out of the euro, their deposits will be converted to a new, less valuable currency.
In question is whether the ECB is supplying money to solve a temporary liquidity crisis or whether it has turned into a solvency problem for the entire Greek economy - where the ECB is not allowed to help.
The ECB's decision is not yet cut and dried yet and is unlikely to result in the support being withdrawn entirely, with a demand that the banks repay the sums they’ve been lent so far.
Instead, the ECB may decide not to lend more than the 89 billion euros it’s already handed over. This would mean Greek banks would not be able to meet their customers’ requests for withdrawals. The system would have to shut down.
Greek bank customers have been flocking to withdraw their money amid fears of a euro exit.
So the ECB’s actions will have a very significant impact on the lives of ordinary Greeks. It puts the central bankers exactly where they don’t want to be – in the firing line of angry and upset citizens. But they delayed stepping in until the political process broke down, which happened on Friday when the Greek Prime Minister abandoned talks with other eurozone leaders and called the surprise referendum to be held a week today.
By stepping outside the diplomatic path, Alexis Tsipras now walks alone and his peers rejected his request for an extension of the current bailout of his government until the result of the referendum is known. The eurozone ministers also explicitly gave their support for whatever the ECB decides.
Tsipras
Greece's Prime Minister Alexis Tsipras has insisted on calling a referendum on the bailout offer.
Greece's banks may decide not to open tomorrow or they may be ordered not to, while the authorities try to bring order to the brewing chaos. It would be a very unhappy ‘bank holiday’ that could last for days causing severe disruption to the economy.
Alternatively, the banks could be ordered to limit how much customers can withdraw at any one time and limits placed on movement of cash abroad, known capital controls. This is less disruptive but can last much longer and experience in other economies shows that it causes a lasting damage.
The Austrian finance minister announced this morning that a Greek exit from the eurozone “appeared almost inevitable.” With the first departure of a eurozone member from the single currency area comes the (still remote) possibility that it might be the first to leave the European Union altogether. With Russia circling here is an awful lot of political will, not least in Germany, to try to ensure that doesn’t happen.