Greece heads toward euro exit

Greece is hanging on in the euro, possibly the EU, by the thinnest of threads.

After a dramatic weekend of surprise midnight demarches, acrimonious negotiations in Brussels and a heated 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 solution, the outlook for Greece and the EU in coming days is turbulent: Capital controls imposed in Greece, bank runs and failures, the first-ever debt default by a eurozone country 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 would raise doubts about the viability of the 15-year-old euro project. If Greece can’t stay in, why would southern Europe’s other weak economies? Greece is also a democratic beachhead 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, however unlikely it seemed, to keep it in the euro.

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, Eurozone 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 that will ask voters to choose between further austerity or likely default.

The economic and political die has probably 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 due 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 signaled its intention to cut off liquidity support to Greek banks, which totals almost €90 billion, setting the stage for the financial sector’s collapse. Members of the ECB will have an emergency conference call on Sunday.

Greek Finance Minister Yanis Varoufakis on Sunday told the BBC that he was considering imposing capital controls on Greek banks and a bank holiday on Monday, according to Reuters. Yet he tweeted later in the day that: “Capital controls within a monetary union are a contradiction in terms. The Greek government opposes the very concept.”

EU plans for Grexit

By Saturday afternoon, after 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 €360 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 German Finance Minister Wolfgang Schäuble 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.”

Eurogroup President Jeroen Dijsselbloem stressed that Greece is still a member of the euro. “I’ve always said and will say the door is open,” he told the press at the conclusion of the second session, which he called an “informal ministerial meeting,” the Eurogroup minus one.

“It was not the institutions that walked away from the talks last night,” Dijsselbloem continued. “It was the representatives of the Greek government that walked away from those talks. It was not us that said the talks were going in a negative way. It was the Greek government that said what is on the table was a ‘no’.”

Back in Athens

This weekend across Greece, long queues began to form at cash machines and gas stations as residents braced for the worst. ATMs ran out of money and a leading bank suspended operations.

By Saturday afternoon, more than €600 million had been withdrawn from Greek banks since Tsipras made his announcement, according to an EU official. The volume of withdrawals for a normal weekend is €30 million.

Greeks have taken out more than €35 billion in deposits since the beginning of the year, forcing the banks to seek constantly ask to re-up emergency liquidity from the ECB.

Greek officials have been in contact this weekend with the ECB, trying to win another reprieve for the country’s banks until the referendum. Without a prospect of a political deal with its creditors, the ECB isn’t likely to oblige.

Over 14 hours of often impassioned debate going in early Sunday morning, the Greek parliament debated the proposed referendum.

Antonis Samaras, a former prime minister, described the referendum as a “coup attempt” that would end with “bankruptcy and euro exit” and leave Greece in a similar economic and financial position to Zambia.

Tsipras, the Greek prime minister, bashed its creditors for “not wanting us to reach deal but surrender our political dignity.”

The measure passed 178 to 120, with two abstaining, setting the stage for a July 5 vote. But it looks increasingly doubtful there will be any bailout program on offer by the time Greeks vote.

In his remarks, Tsipras denounced the creditors’ proposal as offering no solution to his country’s crippling debt burden. Greece’s debt amounts to about 180 percent of the value of goods and services the country produces each year, a level most economists agree is unsustainable and unrepayable.

Officials from the Syriza governing party reject the link between a default on loan payments and a Grexit from the euro. Speaking to the press in Brussels after the collapse of the special Saturday summit, Finance Minister Yanis Varoufakis said the referendum “is not about the euro.”

He said that Greece would stay in the eurozone no matter what happens after Tuesday, noting that EU treaties have no provision for a country to exit the the single currency zone.

However, the consensus view in the European Commission is that in case of default, Athens would be hard pressed to stay in the EU, much less the euro.

Recent polls suggest that the vast majority of Greeks — about 80% — want the country to remain in the euro. At the same time, Tsipras’s far-left Syriza party consistently places first in national polls.

Last gasp push

Syriza’s relationship with the rest of the eurozone started off on a bad foot in January, and deteriorated throughout the spring. The breach seems irreparable to Eurogroup officials, who spoke of a sense of relief in the room on Saturday after Varoufakis left for Athens.

“It was extraordinary when he left with Tsakalotos,” an EU official said. “There was a sudden change in the mood, and suddenly they talked about what to say in the statement.… A lot of these people have done nothing but this (work to fix the Greek economy) for five years.”

There was still hope of a deal until Tsipras appeared on television after midnight Brussels time. Throughout that Friday evening, Dijsselbloem, representatives of Greek creditors and Greek government officials were discussing the creditors’ draft proposals in the Commission’s Charlemagne building in Brussels.

When the Greek delegation heard about Tsipras’ decision to call a referendum on the document after night, they abandoned the talks, according to an EU official. “They got a phone call and they left very quickly,” the official said. “Everyone was flabbergasted, shocked.”

Zeke Turner reported from Brussels, Matthew Karnitschnig from Berlin and Helen Popper from Athens. Florian Eder in Brussels and Yiannis Baboulias in Athens contributed to this article.

This article was updated on June 28.