Athens: The battle lines over Greece’s future hardened as the country prepares to leave the protection of Europe’s bailout regime and its citizens grapple with a new reality of capital controls.

As 12,000 people gathered in the central Syntagma Square with banners that read “our lives do not belong to the creditors," Greek prime minister Alexis Tsipras told ERT TV that European leaders wouldn’t throw his country. Meanwhile, a European central banker signaled a way still could be found to keep Greece in the currency bloc—if voters reject Tsipras’s policies in a referendum on Sunday.

“Do they want to kick us out of the euro or the euro zone?," he said, according to a translation of the ERT TV interview. “Let me be frank, no I don’t think so. They will not kick us out of the euro zone, Let me explain why, because the cost is immense."

Tsipras and his adversaries from Brussels to Berlin are surveying a landscape transformed by his shock decision to hold a vote on 5 July. Greece is on course to withhold a $1.7 billion payment to the International Monetary Fund (IMF) due 30 June, and starting at midnight that day the country’s ravaged treasury no longer will be formally under the protection of European Union rescue programmes.

New reality

Tsipras’s decision to hold the vote jolted the financial system so badly that Greece’s 11 million citizens now are coping with a new reality of capital controls that have locked their savings inside the country’s banks.

It is up to Greek voters to change their fate, he said. By embracing the austerity they elected Tsipras five months ago to fight, they can preserve their membership in the euro club.

Honoring commitments

“The question is political. The response to that question, it’s the Greeks who have it," Coeure said. “If the response is ‘yes,’ I have no doubt about the fact that the authorities of the euro zone will find the means, under one form or another, to honor their commitments."

Tsipras is counting on voters’ anger and hurt to strengthen his hand. His calculation is that Greeks can vote “no" to the terms attached to aid and still not pay the price of being forced out the bloc.

“The referendum will give us a stronger negotiating position when the talks resume," he said in the ERT TV interview. “The higher the participation and numbers of people voting ‘no,’ the stronger our position will be."

A vote in favour, the likeliest outcome, would make the government’s position untenable and probably lead to early elections, which could produce new leadership more amenable to the demands of creditors.

Early elections

“We think there is a 60% chance that the electorate will vote yes in favour of the bailout," said Kelvin Tay, Singapore-based chief investment officer for South Asia Pacific at UBS Wealth Management. “That’s likely to be followed by a period of confusion as there will be pressure on the current government to step to down, because they are actively campaigning for a no vote."

“If they step down then we might have to go through another period of elections before the whole deal gets signed and finalized. Bear in mind that on the 20th of July, we have another €3.2 billion worth of payments coming due."

With Greece in financial lockdown and banks closed, Tsipras remained defiant and blamed everyone but his government for bringing the country to the brink of financial paralysis.

“Their plan is not to kick us out of the euro zone," he said in the TV interview. “Their plan was to end hope that in Europe there can be an alternative policy."

Asian markets

On Monday, European equities sank, with the Stoxx Europe 600 Index down 2.7%, while bond yields jumped in Italy, Spain and Portugal. In Athens, the stock market was closed. In early trading in Asia on Tuesday, stocks recovered some of Monday’s decline with the MSCI Asia Pacific Index rising 0.7% at 12:50pm in Hong Kong from Monday’s three-month low. The euro declined 0.4% against the dollar to $1.1193.

Limited to €60 ($67) a day of withdrawals, Greeks will find it impossible to resume life as before. For the poorest, it will be a struggle to survive. A mere 12 hours after issuing the capital-controls decree, the government revoked a provision that exempted pension payments from the caps.

‘Beyond belief’

With panic setting in, the finance ministry had to go on the record Monday night to deny rumors that withdrawals soon will be cut to €20 a day. Tsipras said in the ERT TV interview that banks would re-open when the ECB restarts emergency lending, which could happen “a few hours" after the “powerful result" of the referendum.

“The Greek government’s behavior has been beyond belief," German finance minister Wolfgang Schaeuble said in an ARD television interview. Even so, “it won’t be able to destroy Europe."

Neither German chancellor Angela Merkel nor French president Francois Hollande, the heads of the two biggest economies in the euro, have ceded an inch. European Commission head Jean-Claude Juncker said the “whole planet" would view a “no" vote as Greece turning its back on Europe.

Tsipras, for now, remains unfazed and as defiant as ever.

“Is it possible for them to drive our banks to asphyxiation, to refuse an extension and for them to then expect us to pay the IMF tomorrow?" Tsipras said. Bloomberg

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