Greece bankruptcy looms as creditors reject bailout extension

Greece moved closer to a perilous bankruptcy Saturday after talks over a bailout package broke down with its creditors, who rejected any emergency extension of the aid that has kept the debt-ridden Mediterranean nation afloat.

The other 18 nations that share the euro with Greece said they would not grant a grace period or await the outcome of a snap referendum the Greek government plans to hold next weekend on the bailout proposals on offer from international lenders. Without a deal in hand, Athens is expected to run out of money by Tuesday and default on a payment it owes the International Monetary Fund.

UPDATE: Greece orders banks closed as economic crisis escalates

Such a default could throw the Greek economy into chaos, shut down the country’s banks and threaten its membership in the Eurozone. The ill effects could spread to neighboring nations and even the global economy.

European officials blamed Greece’s left-wing government for “unilaterally” breaking off negotiations by announcing early Saturday its surprise intention to conduct a referendum on the creditors’ proposals — and to actively campaign against their approval.

“The process wasn’t finished, as far as we were concerned. The proposals weren’t definitive. They weren’t formally discussed or decided upon,” said Jeroen Dijsselbloem, the leader of the Eurozone’s finance ministers. “That is a sad decision for Greece, because it has closed the door on further talks where the door was still open in my mind.”

But Greek officials accused their creditors of backing them into a corner and refusing to budge on a bailout formula prescribing more of the same austerity that has made the Greek economy contract by 25% in the last five years.

Early Sunday, the Greek parliament, led by Prime Minister Alexis Tsipras’ anti-austerity Syriza party, voted to put the creditors’ proposed bailout terms to a referendum July 5. Of parliament’s 300 lawmakers, 178 voted in favor and 120 against, with two people absent.

To cheers from his backbenchers, Tsipras declared that Greece would not be bullied into submission by its European partners and urged his compatriots to vote no in the plebiscite. But opposition leaders accused him of putting the country’s membership in the European Union at risk.

The move to hold a referendum took Greece’s negotiating partners by surprise. Analysts said that if it was a ploy to scare them into sweetening the deal, then it backfired spectacularly, with the other Eurozone nations digging in their heels. Instead of talking about new solutions Saturday, Dijsselbloem spoke of insulating the rest of Europe from the fallout of a Greek default.

“The euro area authorities stand ready to do whatever is necessary to ensure financial stability of the euro area,” financial ministers said in a statement after the collapse of talks Saturday.

Some Eurozone officials also said that the referendum would essentially be moot, because Greece’s bailout will have expired by then and the Eurozone’s proposals would no longer be applicable.

Despite the brinkmanship, the Eurozone remains eager to see a deal struck. Although nations such as Germany and France feel they can weather the consequences of a Greek default and its potential exit from the euro, they know that the loss of one of its members would raise serious questions over the stability of the currency.

The Greek finance minister, Yanis Varoufakis, warned as much when he criticized the Eurozone’s decision not to extend the current bailout by a few days to allow the referendum to take place.

“Especially given that there is a very high probability that Greeks will go against our recommendation and vote in favor of the institutions’ proposal, that refusal will certainly damage the credibility of the [Eurozone] as a democratic union of partner member states, and I’m very much afraid that that damage will be permanent,” Varoufakis said.

Amid the harsh rhetoric on both sides, at least one Eurozone nation, France, expressed hope that a solution could still be found and offered to mediate.

Other Eurozone officials took pains to emphasize that Greece remained a member of their club — even though their joint statement came with the footnote: “Supported by all members of the Eurogroup except the Greek member.”

Greeks themselves seemed to take the drama in stride. Although analysts have warned that Greek banks may find themselves flat broke on Monday morning, their lifeline from the European Central Bank cut off absent a deal, there was no run on ATMs in Athens on Saturday.

Some longer lines than usual were reported at cash machines, but no scenes of panic. That, though, could be because, rather than a run, a “slow jog” on the banks has already occurred, with depositors having withdrawn billions of euros from the financial system over the last few weeks to tide them over in case the banks go bust, capital controls are imposed and Greece’s membership of the euro is threatened.