Greece closes banks as financial crisis escalates

UPDATED: Greece in crisis: Banks stay shut until next week – ATM withdrawal limit imposed

Greece will keep its banks closed today and possibly for longer in a bid to prevent its banking system from collapsing.

The government has warned of capital controls and trading on the stock exchange has also been suspended.

This follows a European Central Bank move to cap the amount of emergency loans it is providing as Greeks stepped up their withdrawal of deposits.

The dramatic escalation of the country’s debt crisis was triggered Prime Minister Alexis Tsipras’ decision to call a referendum on July 5 to approve or reject the lending terms being cxtended by the ECB and lenders.

In a televised address, he said the eurozone finance chiefs’ decision not to extend the bailout programme means the central bank will keep banks closed and limit withdrawals. 

“It is more than obvious that this decision has no other goal than to stifle the will of the Greek people and to block the normal democratic procedure of the referendum,” Mr Tsipras said.

Greece is now almost certain to default on a €1.54 billion ($2.5 billion) payment it owes the International Monetary Fund (IMF) on Tuesday.

Greece’s international bailout expires the same day, meaning the country will no longer be under the umbrella of an international rescue package. On Saturday, finance ministers of other eurozone countries rejected Greece’s request for a one-month bailout extension to give it time to hold the referendum.

The financial crisis has been a focus for international markets for the past five years but the effects of a potential default will be limited.

Fallout effects limited to locals
However, in Greece the lack of availability of cash will be severe on the local population and will also deter tourists who will be forced to bring extra money with them.

The ECB says it will take additional steps if needed to calm financial markets from any contagion fears spreading to Spain, Italy and other vulnerable European economies.

This will likely mean stepping up its €60 billion-a-month bond buying programme, which injects liquidity into market.

The IMF is also ready to avert any effects outside Greece.

“The coming days will clearly be important,” managing director Christine Lagarde says. “The IMF also will continue to carefully monitor developments in Greece and other countries in the vicinity and stands ready to provide assistance as needed.”