The Greek referendum

Raising the stakes

DESPITE twists and turns, there appeared to be the makings of a deal between Greece and its international creditors—euro-zone governments and the IMF—in further negotiations on Friday, which would allow urgently needed bail-out funds to be released shortly. That changed abruptly when Alexis Tsipras, the Greek prime minister and leader of the radical-left Syriza party, announced late that night on television that he was calling a referendum on the creditors’ proposals, to be held on Sunday, July 5th. Euro-zone finance ministers who were due in any case to meet in Brussels today to decide upon their next move have yet to respond. But it is clear that Mr Tsipras’s move takes the dispute into perilous territory, bringing Greece closer to the edge of leaving the euro.

Already on Saturday pictures of anxious savers queuing outside banks to withdraw money were circulating. A slow-motion bank run that had already drained €35 billion ($39 billion) of household and corporate deposits out of the Greek banking system between November 2014 and May 2015 threatens to get out of control. Greek banks have been able to cope with the haemorrhage of deposits only thanks to massive borrowing from the Bank of Greece, permitted by the European Central Bank (ECB) in Frankfurt. The ECB is now likely to call time on this and to prevent further increases in this “emergency liquidity assistance” (ELA). That will in turn force limits on cash withdrawals along with capital controls to prevent money leaving the country. There is precedent for this in what happened in Cyprus in the spring of 2013 (it took two years for the capital controls to be fully lifted).

Even if the ECB stays its hand this weekend, it will be forced to act early next week. Without a deal this weekend, the cash-strapped Greek government will be unable to repay the IMF €1.5 billion that is due at the end of this month. Christine Lagarde, the head of the Fund, has already indicated that she will take a tough line in such an event, calling it a default and saying there would be no grace period. Although rating agencies have indicated that this will not affect private-sector debt (through “cross-default” rights of bondholders to demand their money back in the event of a default to another creditor), a failure to repay the IMF will strengthen the position of those on the governing council of the ECB who have been arguing for a tougher line on ELA.