ECB freeze forces Greek bank closures

Greece will close its banks on Monday in an attempt to avoid panic after the European Central Bank decided today to freeze the emergency funding that has kept the country’s banks afloat.

The enforced bank holiday may well have to last until a referendum next weekend when Greek voters will be asked whether they want to endorse or reject the proposed terms of a longer-term bailout deal.

It will also mean that holidaymakers hoping to take advantage of Greek summer sun have to take enough euros with them to get through.

The announcement of the referendum by Alexis Tsipras, the hard-left Greek prime minister, promped fury at a eurozone ministerial meeting in Brussels yesterday at which Athens was accused of turning its back on long-running negotiations.

There was speculation that the ECB could entirely cut off the emergency liquidity assistance (ELA) that has been keeping Greek banks afloat as their customers lined up to withdraw billions of euros in recent weeks. It is not clear how long the banks can continue without extra money from the Frankfurt bank.

In the event, the ECB decided to keep its ELA funding at its current level — preserving the lifeline but removing the longer-term guarantee of liquidity for Greek banks. By walking away from the nuclear option, the ECB appeared to be banking on a “yes” vote in next week’s referendum after an opinion poll suggested that a majority of voters would defy the government and vote for the debt agreement.

Yanis Varoufakis, the shaven-headed Greek finance minister, told the BBC today that officials in Athens and Frankfurt would work overnight on the twin issues of bank closures and capital controls.

But he added: “It is our view that a monetary union that cannot gurantee functioniong banks — especially on the pretext that the Greek people have had the audacity of demanding a say in their future — constitutes a major denial of the very principle of a monetary union.”

The minister said that any decision to cut central bank funding would mean that “Europe has failed in its duty to preserve in parallel a democractic process and a monetary union”.

Mr Varoufakis denied, however, that Greece would have to leave the euro if it defaults on its debts, which include a €1.6bn payment to the IMF due on Tuesday. He said that Greece was still owed €1.9bn as a its share of ECB profits from last year, so the troika of EU creditors could easily sort out that funding between them.

As the bankers in Frankfurt prepared to meet, the French prime minister Manuel Valls appealed desperately to Greece and its European partners to do whatever they could to keep Greece in the 19-nation bloc that uses the euro currency.

“We don’t know — none of us — the consequences of an exit from the eurozone, either on the political or economic front,” he said. “We must do everything so that Greece stays in the eurozone,” he said.

Mr Valls added that that “means respecting Greece and democracy, but it’s also about respecting European rules, so Greece needs to come back to the negotiating table”.

The decision to call a referendum angered Mr Varoufakis’s colleagues within the eurozone.

“That is a sad decision for Greece because it has closed the door for further talks where the door was still open in my mind,” said Jeroen Dijsselbloem, the group’s Dutch head.

Germany’s hardline pro-austerity finance minister, Wolfgang Schäuble, said that the Greek government had “ended the negotiations unilaterally”.

“They were playing poker,” said the Austrian Hans Joerg Schelling. “But in poker, you can always lose.”

Christine Lagarde, The IMF chief, for her part, warned that the planned referendum would be based on bailout terms for the country that are no longer valid as the current programme expires on Tuesday – a point that Mr Varoufakis disputed.

Ms Lagarde appeared to hint at a possible way out of the impasse when she said that if Saturday’s vote produced a resounding ‘yes’ to the terms of the deal then the country’s creditors would be willing to make an effort. There was still time, she said, for Athens to change course and accept the proposals.