Europe’s central bankers are facing one of the biggest crises in the history of the euro: How to keep Greece’s financial system from collapsing in panic.
The European Central Bank said Sunday it would provide no new emergency support to Greek banks after bailout talks between Greece and its creditors collapsed Saturday. Instead, the ECB said it would keep funding at recent levels, but that might not be enough.
It was forced to act because without a bailout in place, Greece is heading for default and may have to leave the euro.
In the ECB statement, Greek central bank governor Yannis Stournaras said he would “take all necessary measures to ensure financial stability for Greek citizens in these difficult circumstances.”
Those measures were being debated in Athens Sunday, but could include bank holidays starting as soon as Monday, or the introduction of so-called capital controls, something the Greek government is likely to resist.
Capital controls are used only at times of extreme stress in a banking system. They are rules that would restrict the amount people can withdraw from banks. They are aimed at staunching panicked bank runs.
The country’s banks have been bleeding billions of euros for months, even before the country’s debt crisis took a dramatic turn for the worse this weekend, leading to long lines at ATMs in Athens.
Greece faces a critical deadline on Tuesday, when it must make a loan payment to the International Monetary Fund. Greece looks almost certain to default on that payment.
Bailout talks collapsed Saturday after Prime Minister Alexis Tsipras walked away from talks with the eurozone, calling for a referendum on July 5, which will give Greeks the chance to vote on whether to accept Europe’s bailout terms.
An extended bank shutdown or tough capital controls would likely wreak further havoc on the Greek economy by scaring away tourists and chilling commercial activity.
And with Greece unable to borrow from financial markets, and apparently unwilling to strike a deal with the only institutions prepared to lend it money, it will find itself sliding rapidly towards exit from the euro.
The ECB was forced to act because its rules state it can’t keep pumping euros into banks that are considered insolvent. If the situation deteriorates further, it may be forced to withdraw emergency support altogether.