Endgame in Greece

Greece has decided that the only way to save its cash-strapped financial system is to shut it down.

Ahead of a Tuesday deadline to pay back $1.8 billion that Athens owes the International Monetary Fund, Greek banking executives said they wouldn’t open for business Monday. They also imposed a series of capital controls, including the suspension of withdrawals –one report indicates Greeks will only be able to take out 50 euros Monday — and money transfers to keep cash inside the country. The Greek stock market will also be shuttered as the week gets underway.

It became increasingly clear this weekend that without a dramatic intervention, many Greek banks would fold if they opened for business Monday morning. On Saturday, after Greek Prime Minister Alexis Tsipras called for a July 5 referendum to decide whether to accept European-imposed austerity, thousands of people lined up at ATMs to withdraw some $446 million in the latest in a series of bank runs by panicked Greeks.

Early Sunday morning, Greek lawmakers voted to put Greece’s fate in the hands its people. Politicians from Tsipras’s Syriza party are already urging Greeks to reject pension reforms and new taxes on the wealthy and businesses there. If they do, Greece would no longer have access to a $270 billion bailout package meant to keep the country solvent.

The European Central Bank isn’t waiting for Greek voters to weigh in. It suspended an emergency lending program to Greek banks Saturday, cutting off the last remaining financial lifeline to cash-strapped banks. The only reason they’ve survived this long is because of a June 19 emergency loan amid an earlier run on Greek banks.

In other words, shutting down the Greek financial system is really the only way to save it.

“It is clearer than ever that this decision has no other goal apart from blackmailing the Greek people and obstructing the smooth democratic procedure of the referendum,” Tsipras said on Greek television Sunday. He didn’t mention Monday’s financial blackout.

The decision to suspend economic activity in the Mediterranean nation is the latest development in an escalating endgame between Tsipras and his creditors, the IMF, the European Commission, and the European Central Bank. The prime minister, along with his finance minister, Yanis Varoufakis, are betting European leaders like German Chancellor Angela Merkel would give in to Greek demands to preserve the current membership of the European monetary union.

Merkel is torn between pro-“Grexit” Germans — those in favor of Greece leaving the eurozone — and allies like U.S. President Barack Obama, who want her to preserve European unity at all costs to keep economic sanctions on Russia for its actions in Ukraine. The two world leaders spoke by phone Sunday, according to the White House, and Obama urged Merkel to find a way to make a deal with Athens.

White House anxiety about the crisis is evident beyond the phone call. On Sunday afternoon, U.S. Treasury Secretary Jack Lew issued a statement calling for a compromise. He also called IMF chief Christine Lagarde, as well as the finance ministers of Germany and France, and urged them to give Athens some debt relief.

Whether a potential compromise is realistic at this point remains to be seen. Early last week, European officials seemed confident that a deal was within reach if Athens levied new taxes. But as talks progressed, Germany demanded more substantial reforms to the bloated Greek pension system. Tsipras refused, then unexpectedly abandoned his promise to end the five-year Greek crisis by calling for next week’s referendum. That led to Saturday’s run on banks.

The European Central Bank announced Saturday that it was taking steps to insulate the monetary union from the Grexit. Other European economies have had five years to prepare their economies for the possibility of Greece leaving the euro, and officials think the broader financial fallout could be contained. But in truth, no one will really know how the Grexit would affect Europe until it actually occurs.

As the Monday shutdown shows, the Grexit would be financially catastrophic for Greece. It would revert to its previous currency, the drachma, which would be virtually worthless. One in four Greeks is already out of work, a statistic that would only worsen were Greece to leave the eurozone.

The shutdown does give Greece one more day to compromise, however. Both the European Commission and the IMF issued statements Sunday suggesting there is still time to come to an agreement.

And lurking in the background is Russian President Vladimir Putin, who has been conspicuously silent as the crisis escalated this weekend. Earlier this month, he met with Tsipras, and Russian officials have hinted they would consider giving Greece money to cover the $1.8 billion it owes the IMF by Tuesday. The last thing Merkel wants is a NATO member country allying itself with Moscow against Ukraine.

Perhaps Tsipiras is playing this angle. He now has three choices: 1) Accept European austerity, 2) get into bed with Putin, or 3) watch the Greek economy collapse around him. Option two would reshape Europe’s post-Cold War order. Maybe he’s betting that’s enough of a threat to get Merkel, and the rest of Europe, to cave to his demands.

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