Statement of Professor Clemens Fuest, President of the Centre for European Economic Research (ZEW), on the Greek Referendum

Deadline extension for Greek referendum requires capital controls as from Monday. A comment by Professor Clemens Fuest on Prime Minister Alexis Tsipras' announcement of a referendum on the bailout programme on July 5, 2015.

"The announcement to hold a referendum about the bailout conditions for Greece will intensify the run on Greek banks. Without capital controls on Monday, the ECB will face the choice between either letting the Greek banks collapse or extending emergency liquidity assistance (ELA) for Greek banks. The latter would further increase the losses for the creditors, and ultimately the taxpayers in the rest of the eurozone, if Grexit comes. While Greek bank customers withdraw their money cash or send it abroad, the ECB replaces that money.

The extension of ELA would also make it more attractive for Greece to opt for Grexit, because if Greece stays in the euro, ELA credit will have to be paid back. If they opt for Grexit, the creditors will have to write off most of their loans, while Greek bank customers keep the euros they have withdrawn. Therefore, extending the deadline until 5 July is only possible with capital controls.

If the referendum comes and the Greeks say no to the bailout conditions, Grexit will be inevitable. Technically it would be possible to keep the country in the eurozone, but that would be equivalent to an unconditioned haircut on the debt, which the creditor countries will not accept."