Greek MPs approve referendum as lenders see difficulties ahead

Greek lawmakers on Sunday authorized Prime Minister Alexis Tsipras’ proposed July 5th bailout referendum, setting Greece on course for a plebiscite that has enraged international creditors and increased Greece’s chances of exiting the euro zone.

The government easily passed the 151-vote threshold needed to authorize the referendum, with deputies from the far right Golden Dawn voting with the government and pro-European opposition parties New Democracy, PASOK and To Potami and the KKE Communist Party voting against.

A total of 178 lawmakers backed the proposal and 120 voted against. Two were absent.

Greeks are due to vote on whether to accept or reject the latest terms offered by creditors to Athens in order to unlock billions of euros in bailout funds.

European partners have reacted negatively to the announcement of the referendum. On Saturday, they rejected a request by Tsipras to extend the current bailout in order to cover the period leading up to the referendum. The rejection means Athens is likely to default on a key payment to the International Monetary Fund on Tuesday.

Meeting in Brussels Saturday evening after rejecting Greece’s request to extend its aid program beyond June 30, eurozone finance ministers said the cash-strapped nation will need to take steps to protect its banks. The European Central Bank, which has kept the nation afloat, is set to discuss Sunday whether to pull the plug on its emergency lending, leaving the country with no backstop.

“Monday could be a bank holiday” in Greece, Ireland’s Michael Noonan told reporters. “It’s not a question of waiting to see what might happen on Monday in terms of crisis. The crisis has commenced.”

In Brussels, recriminations were replaced by wistfulness among the policy makers as the prospect of Greece’s exit from the euro after more than five years of crisis-fighting drew closer.

“Plan B is fast unraveling and becoming Plan A,” said Finland’s Alexander Stubb. The upshot is “potentially a very sad day.”

Tsipras told the parliament in Athens that the referendum isn’t intended to mark a “rupture” with Europe, and said that extreme voices had prevailed among the country’s creditors. He said a sustainable agreement is still “on the table.”

The premier also invoked Franklin Delano Roosevelt, telling lawmakers that “the only thing the people of Greece have to fear, after so many years of pillaging, is fear itself.”

Public opinion is at odds with Tsipras, according to a survey published Saturday. Two-thirds say Greece should remain in the euro area and 57.5 percent say the government should back down to reach a deal with creditors, the Kapa Research poll for To Vima newspaper showed.

‘Acute Difficulties’

Jeroen Dijsselbloem, the Dutch finance minister and head of the Eurogroup, told reporters in Brussels that Varoufakis had requested a one-month extension. With “no comprehensive package agreed” to by ministers, Dijsselbloem said the Greek government faces the expiry of its aid program on Tuesday night without any future financing in place.

In the coming days, “Greece will experience acute difficulties,” German Finance Minister Wolfgang Schaeuble told reporters in a briefing that ended with him shrugging his shoulders.

Even if that happens, the other 18 euro countries are in a better position to contain the damage than when the crisis initially spread from Greece in 2011 and 2012, several ministers said.

‘Clear Failures’

Greek Finance Minister Yanis Varoufakis said that his government rejected the latest offer by creditors — the European Commission, the ECB and the International Monetary Fund — to unlock aid in return for more fiscal austerity because the package gave no hope that Greece would emerge from the economic crisis.

He said the measures, ranging from cuts in pensions to wage curbs, have been “quite clear failures” since Greece first sought aid in 2010, leading to twin bailouts worth 240 billion euros ($268 billion). Still, Varoufakis said, it’s possible that a majority of Greeks will vote in the referendum to accept the creditors’ plan.

It’s not clear, though, whether those proposals will still be on offer by then. IMF chief Christine Lagarde told the BBC late on Saturday that “legally speaking, the referendum will relate to proposals and arrangements that are no longer valid.”

Greece is due to make a payment to the IMF of about 1.5 billion euros on June 30. If that is missed,“Greece no longer has access to funding,” Lagarde said.

Bank Run

The ECB has increased Emergency Liquidity Assistance in weekly and sometimes daily increments to the Greek central bank to funnel to the country’s lenders amid a slow-motion bank run. The total stood at almost 89 billion euros as of Friday, up from less than 60 billion euros in February.

While any decision to rein in ELA requires a two-thirds majority in the 25-member Governing Council, that may not be hard to achieve should ECB chief Mario Draghi back it. He would already have weighty support from Germany’s Jens Weidmann.

The Bundesbank president said on Thursday that ELA for Greece raises “serious” concerns over monetary financing of governments, which is illegal under European Union law, as Greek banks regularly roll over about 9 billion euros of short-term government debt.

[Reuters & Bloomberg]