Skip to main content

Red spray paint covers a French-language Bank of Greece sign to read 'Bank of Merkel' in reference to German Chancellor Angela Merkel in Athens, Monday, July 6, 2015.Thanassis Stavrakis/The Associated Press

Greek Prime Minister Alexis Tsipras sacked his abrasive finance minister, assembled a new negotiating team and moved frantically to deliver a fresh bailout proposal to its creditors as time bombs ticked away in its banks.

Impatient – even angry – European leaders and finance ministers made it abundantly clear that a serious and workable proposal needed to be delivered to them on Tuesday if Greece is to have any hope avoiding an exit from the euro zone and probable economic collapse.

The creditors' negotiating stance had hardened on Sunday, when the Greek referendum went overwhelmingly to the No camp, signalling a rejection of their last austerity-laden bailout offer. Mr. Tsipras had argued that a No vote from the Greek people would boost his negotiating leverage among the country's paymasters in Brussels, Frankfurt and Berlin. But the message seemed lost on the creditors, who were in no mood to be generous after the poll went against them.

Valdis Dombrovskis, the European Commission's vice-president in charge of euro-zone policy, said the No vote "unfortunately widened the gap between Greece and the euro-zone countries."

At a Monday evening meeting in Paris with French President François Hollande, German Chancellor Angela Merkel pried open the negotiating door a bit, but only a bit, to a new offer from Greece.

"It will be important [Tuesday] that the Greek Prime Minister tells us how this should move forward," she told the media at the Élysée Palace. "The last offer we made was a very generous one."

As Mr. Tsipras scrambled to come up with a reform-for-loans formula that would fly with the creditors, long lineups formed at cash machines throughout Greece. Bank customers suspected that the banks would not reopen Tuesday, and that the withdrawal limits would be cut, to the point that families would struggle to pay for basic needs.

They were right on the first count. The banks are to stay closed Tuesday and Wednesday, the Greek banking association revealed late in the day. The €60 ($84) a day ATM withdrawal limit that had been in place for a week remained unchanged, but almost every Greek thinks the limit is far more likely to go down than up as the bank crisis shows no sign of easing up.

"The Greek banking system cannot return to its normal capabilities without a new deal," said Achilleas Kasimidis, 29, a salesman at a technology startup who is convinced the banks will stay closed all week. "It currently lies at the brink of collapse."

When the government of Mr. Tsipras announced on June 28 that the banks would shut their doors, and that a daily withdrawal limit would be imposed, it said the banks would reopen on July 7. But it appears the promise was made on the assumption that the European Central Bank would boost the emergency liquidity assistance (ELA) to the Greek banks. It has not, putting the banks dangerously close to running out of cash.

On Monday evening, the ECB kept the ELA program unchanged. That was bad news for the Greek banks. Since most of the existing ELA has already been soaked up by the banks to cover the steady outflow of deposits, merely leaving it unchanged, instead of increasing it, leaves them with a razor-thin safety cushion.

"The liquidity crunch can only be alleviated in the immediate term by the ECB via an increase in ELA to Greek banks," Manulife senior economist Megan Greene said in a Monday note written from Athens. "In the absence of a deal – or at least concrete progress toward a deal – it is unlikely the ECB will increase its own exposure to Greece. By raising ELA, the ECB would effectively be financing a bank run."

A senior banking official, who did not want to be identified, said Monday that the banks had access to about €1.5-billion of liquidity. Of that amount, only about €500-million remained in ELA. The remaining €1-billion was in bank vaults and at the banks' current accounts at the Bank of Greece. The official said the banks were losing about €150-million a day, mostly through the ATM withdrawals and the limited pension payments, implying they have 10 days before they are bled dry and would collapse.

If the withdrawal limits are reduced to, say, €40 or €30 a day, the banks might be able to survive a few days longer.

If the banks collapse, Greece almost certainly would be forced out of the euro zone and reprint the drachma. Many economists put the chances of a Greek exit – Grexit – at well higher than 50 per cent.

On Monday morning, Greek Finance Minister Yanis Varoufakis, who had accused the creditors of financial "terrorism" ahead of Sunday's referendum, resigned. He was replaced by Euclid Tsakalotos, the Oxford-educated, left-leaning head of the Greek bailout negotiating team.

Mr. Varoufakis's departure was announced on his blog and was seen as a sort of peace offering to the creditors – the ECB, the European Union and the International Monetary Fund. His combative style had won him no friends during the negotiations with Greece's creditors.

Mr. Varoufakis said: "Soon after the announcement of the referendum results, I was made aware of a certain preference by some euro group participants and assorted 'partners' for my … 'absence' from its meetings, an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason, I am leaving the Ministry of Finance today."

Scornful of the creditors who wouldn't see his way, he said: "I shall wear the creditors' loathing with pride."