Greece debt crisis puts euro, European Union in peril

As the Greek debt drama hurtles toward a nail-biting climax, fears are mounting that the outcome could sink not just Greece but also the euro and the idea of the European Union itself.

Athens is dangerously close to bankruptcy after days of fruitless negotiations with international lenders over a new bailout package to keep it afloat. A Greek collapse could leave European leaders scrambling to prevent turmoil from spreading to other vulnerable Eurozone countries such as Italy and Portugal.

On Sunday night, Greek officials announced that Greece’s ailing banks would be closed to prevent a further hemorrhage of cash from the financial system, after the pullout of billions of euros by worried depositors in recent weeks.

The country's banks will be shut through July 6, although officials could shorten or extend that term, and ATM withdrawals will be limited to $66 a day, according to the Associated Press. People with cash and credit issued in other countries are exempt from the withdrawal limit, the AP said.

The turmoil caused the euro’s value to drop sharply in early trading in Asia on Monday.

In a brief television address — his second in less than 48 hours — Prime Minister Alexis Tsipras assured his compatriots that their savings and pensions were safe. But the extraordinary step, following an emergency Cabinet meeting, sent residents scurrying to join long lines at ATMs, some of which were empty.

Tsipras blamed the situation on Greece’s creditors for refusing to extend his country’s current bailout past its Tuesday deadline — the latest verbal volley in what has become a high-stakes game of chicken between Athens and fellow members of the 19-nation Eurozone.

Without a new funding deal in place, Greece will almost certainly fail to pay the $1.8 billion that is due the International Monetary Fund on Tuesday, becoming the first developed country to default on an IMF debt.

That could cause Greece to crash out of the Eurozone, an unprecedented step whose potential consequences have officials and investors on edge.

In such an event, the Greek economy would be thrown into chaos as the government imposed heavy capital controls, rushed to reintroduce the drachma and tried to placate angry citizens and businesses whose savings suddenly plummeted in value.

Finance officials are hopeful that they could contain the fallout and keep borrowing costs for bigger countries such as Spain from rising to unsustainable levels.

But even if they succeeded, the damage to the euro’s credibility as a safe currency — and to the EU’s cherished ideal of “ever closer union” on a continent torn apart by two world wars — could be irreparable.

“The objective of the euro was to deepen economic integration between member states, foster a closer common polity and European identity,” said Simon Tilford, deputy director of the Center for European Reform in London. “It has not done any of those things. It has actually undermined all those things. Forcing Greece out will only exacerbate that damage.”

European leaders are eager to avoid a potential doomsday scenario. President Obama has also weighed in: The White House said the president and German Chancellor Angela Merkel agreed in a phone call Sunday that “it was critically important to make every effort to return to a path that will allow Greece to resume reforms and growth within the Eurozone.”

But European officials have also expressed exasperation with Tsipras’ government, which abruptly walked out of bailout talks in Brussels on Friday. The two sides have been unable to agree on what Greece must do to raise revenue and cut spending if it wants to continue receiving aid from international lenders.

Tsipras stunned his Eurozone partners by announcing Saturday that he would put their bailout proposals to a public referendum next weekend. Moreover, he and his left-wing Syriza party plan to urge voters to reject those proposals, denouncing them as a recipe for more hardship, especially for the poor and elderly, in an economy decimated by years of forced austerity.

Athens has proposed higher taxes on the wealthy and big corporations instead, but creditors worry that that would hamper growth.

The other 18 Eurozone nations quickly closed ranks, warning that they would not extend Greece’s current bailout package past its expiration Tuesday. That means that Athens could run out of money and tumble into default well before voters even had a chance to cast their ballots in the plebiscite.

In a measure of how much trust has broken down, European officials took the unusual step Sunday of releasing their bailout proposals to show that they had made some concessions and were prepared to address other Greek demands, such as debt relief, when Athens’ negotiators abruptly pulled out.

For his part, Yanis Varoufakis, Greece’s outspoken finance minister, publicized remarks he made to his Eurozone counterparts at a closed-door meeting Saturday. He complained that the Greek government’s counterproposals were “never taken seriously,” and that “common ground was thus sacrificed in favor of imposing upon our government a humiliating retreat.”

In many ways, Tsipras’ administration is caught in a bind of its own making. He swept to power after elections in January on the strength of campaign promises that many critics warned were irreconcilable.

“They’ve developed a narrative of ‘We can have our cake and eat it. We can be in the Eurozone and end austerity,’” said Kevin Featherstone, an expert on Greece at the London School of Economics.

Those goals are essentially mutually exclusive in the present climate. Led by Germany, Greece’s creditors have shown virtually no willingness to deviate from their prescription of heavy public-spending cuts in exchange for bailout funds.

Featherstone said that holding a referendum on such short notice could continue to blind Greeks to that fact.

“With one week of a referendum campaign, there’s plenty of scope for emotion rather than rational calculation,” he said. “A longer campaign, even two weeks, would allow for more consideration of all of the implications of what Greece is about to do.”

Even if voters accepted the creditors’ proposals, another political crisis could ensue. After having campaigned against the deal, Tsipras’ government could collapse. Or creditors might have no confidence that he would implement measures he publicly opposed.

For all their irritation, European officials know that their reputations, too, would suffer from the failure to reach an agreement with Athens.

They also know that expulsion of Greece from the Eurozone would call into question the whole idea of the EU. The euro is intended to serve as perhaps the most potent symbol of European amity and unity after a century of war and division; indeed, nations wishing to join the EU must commit to adopting the currency. Eurozone membership is supposed to be irreversible.

A Greek exit from the euro would explode that idea, and could start unraveling the project of greater European integration.

And investors would have grounds to fear that other, larger countries could also abandon the euro in tough times. Trust in the common currency could evaporate.

“Clearly, once a country leaves a currency union, that currency union becomes to all intents and purposes an exchange-rate mechanism, not a currency union,” said Tilford of the Center for European Reform. “If they do force Greece out, there’s a very real risk of contagion at the next downturn.”

That’s why, he said, European leaders have already tried to cushion the impact of a potential Greek exit by painting Greece as an outlier.

“There’s really going to be a concerted attempt to portray this as one bad apple ... that Greece leaving doesn’t tell us anything about the long-term success of the currency union,” Tilford said. “That’s going to be the narrative. But I think that’s going to be just a narrative shared by Eurozone governments.”

There were a few signs Sunday that Greece’s creditors were trying to coax it back to the bargaining table.

Pierre Moscovici, the EU’s top economic official, said via Twitter that Greece “should stay in [the] euro…. The door is still open for negotiations.”

But it is unclear whether the Greek government has responded.

Times staff writer Jim Puzzanghera in Washington contributed to this report.

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Copyright © 2016, Los Angeles Times

UPDATES

6:55 p.m.: This article has been updated with how long the banks are expected to be closed and with ATM withdrawal limits.

4:41 p.m.: This article has been updated with the euro opening lower on Asian markets.

1:28 p.m.: This article has been updated with staff reporting, expert comments and background information.

The first version of this article was posted at 12:03 p.m.

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