GLOBAL market participants are fretting that the Greek crisis is heading for a climax of likely loan defaults, probable temporary bank closures and a potential exit from the eurozone.
Greek, Portuguese, Spanish and Italian bonds and equities are predicted to open weaker on Monday morning, but the European Central Bank (ECB) is also forecast to flood the eurozone market with liquidity by stepping up purchases of securities under its quantitative easing (QE) programme. This extra liquidity would be aimed at countering contagion selling from the Greek crisis.
Jeroen Dijsselbloem, the Dutch finance minister who presides over meetings of eurozone finance ministers, said that the bloc would "make full use of all the instruments available to preserve the integrity and stability of the euro area". Other ministers added that they would make sure that turmoil in Greece won't affect the stability of their own countries.
In the worst possible outcome of the prolonged Greek debt negotiations, all the other finance ministers of the European Union rejected Greece's request for another extension of loan repayments until after a July 5 referendum. The referendum, which has been passed in the Greek Parliament, will ask voters whether they accept a new creditor deal on pension reforms and other measures to cut public spending.
As fractious negotiations continued on Saturday, the run on Greek banks accelerated into Sunday. According to a Reuters estimate, more than a third or some 2,000 of automated teller machines (ATMs) across Greece ran out of cash on Saturday before they were replenished. The Bank of Greece disclosed that deposits had declined to just below 130 billion euros (S$196 billion) by the end of May. Withdrawals in June indicated that the level could easily fall below half the 240 billion euro bank deposits in 2010, before Greece's economy and debt problems worsened.
Banks would have closed already had the ECB not provided to Greek banks an estimated 100-120 billion euro loans and emergency lending directly and via the Bank of Greece. The bulk of the cash flight has landed in foreign banks and the rest has been hidden in houses and gardens of Greek citizens. As The Business Times went to press, board members of the ECB were deciding whether to continue to provide assistance to stressed Greek banks, as a default would cause the value of their collateral to decline.
Ahead of the decision, "well- placed sources" told the BBC that the ECB would probably turn off Emergency Liquidity Assistance (ELA) for Greek banks, but this was unconfirmed. In that event, Greek banks would have to close. Capital controls would have to be placed on Greek corporations and citizens if, as expected, Greece defaults on a 1.55 billion euro International Monetary Fund (IMF) repayment due on Tuesday.
In the meantime, EU finance ministers have said that "the current financial assistance arrangement with Greece (7.2 billion euros from a bailout programme totalling 245 billion euros) will expire on 30 June 2015".
Nicholas Economides, an NYU Stern School of Business economics professor, warned that in the likelihood of default, Greek bond prices would fall, raising the effective interest rates on all loans. This would mean that the value of banks' collateral would fall, implying that the ECB would find it more difficult to lend banks more money. Businesses would also find it tough and more expensive to borrow money from foreign banks and other institutions, he said.
"I'm truly appalled with the Greek prime minister to hold a referendum and unload (the debt negotiation burden) on Greek people," Prof Economides said. "The average Greek person cannot comprehend the details and the overwhelming majority prefer to stay in the euro."
IMF managing director Christine Lagarde said in an interview with the BBC that the referendum would be asking voters to weigh creditors' proposals that are no longer under consideration.
"I can't speak for the IMF programme, because the IMF programme is on, but the European financial arrangement expires June 30," she said. "So, at least legally speaking, the referendum will relate to proposals and arrangements that are no longer valid."
German Finance Minister Wolfgang Schaeuble said that since Greek Prime Minister Alexis Tsipras declared a referendum, "the negotiations apparently have been declared at an end. If I understood correctly . . . we now have no basis for further negotiations".
In response, Greek Finance Minister Yanis Varoufakis countered: "The refusal of the (eurozone finance ministers) to endorse our request for an extension of the agreement, so as to allow the Greek people to deliver their verdict on the proposals, will certainly damage the credibility of Eurogroup as a democratic union of partner member states - especially given that there is a high probability Greeks will go against our recommendation and vote in favour."
If Greece votes in the referendum to agree to the creditors' conditions for further financial help, the government would have to ask for and negotiate a third bailout programme with international lenders.
"When there is a will, there is a way," said the IMF's Ms Lagarde, claiming that the creditors were flexible and understood the Greek populace's plight.
READ MORE: Lagarde's stellar career haunted by Greece