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(Bloomberg) — Greece moved to avert the collapse of its financial system by shutting lenders and imposing capital controls as of Monday, a measure that will deepen the country’s recession and risk driving it toward an exit from the euro.

The move to husband resources followed the breakdown of aid talks with international creditors late Friday and a European Central Bank decision to freeze its lifeline to Greek banks. On the streets, lines at ATMs and gas stations showed the effect on daily life.

With cash flooding out and its financial backstop gone, Greece becomes the second euro-area country, after Cyprus in 2013, to declare a bank holiday and impose capital controls. European officials discussed quarantining Greece from the rest of the currency bloc, while keeping it from spinning out of the euro’s orbit.

“A very dark day for Greece,” Nicholas Economides, a professor at New York University’s Stern School of Business, said by phone. “The Greek economy, already at standstill, will go to deep freeze.”
The government issued a decree imposing capital controls and shutting banks at almost 3:00 a.m. on Monday in Athens. Earlier, Prime Minister Alexis Tsipras said the steps were recommended by the Bank of Greece in a Sunday meeting of the country’s financial-stability authority.

Banks in Greece will be closed until at least July 6, according to the decree, and there will be a daily cash withdrawal limit of 60 euros ($66.04). Bank transfers or payments abroad will be banned.
The 19-nation euro dropped 1.6 percent to $1.0992 by 8:25 a.m. in Tokyo.

Patience, Composure

“In the coming days, what’s needed is patience and composure,” Tsipras said in a televised statement. “The bank deposits of the Greek people are fully secure. The same applies to the payment of wages and pensions — they are also guaranteed.”

German Chancellor Angela Merkel spoke to President Barack Obama on Sunday, agreeing on the importance of keeping Greece in the euro. In a phone call, Treasury Secretary Jacob J. Lew told Tsipras it was in Greece’s best interest to find a sustainable solution to the crisis, according to a Treasury statement.
The weekend developments marked an abrupt turn from last week, when markets rallied on hopes that a deal between Tsipras’s anti-austerity government and creditors — comprising the ECB, European Commission and International Monetary Fund was at hand.

Share Gain

Greek shares posted their biggest weekly increase since 2008, rising 16 percent. Yields on 10-year notes closed at 10.7 percent on Friday, down from 13.4 percent in April.
The optimism vanished after midnight on Friday when Tsipras’s shock call for a July 5 referendum on the austerity demanded by creditors, just days before the June 30 expiry of the current bailout and a $1.7 billion payment due to the IMF.
In the aftermath, Greeks lined up to get access to as much of their money as they could. Two senior Greek bank executives said as many as 500 of the country’s more than 7,000 ATMs ran out of cash by Saturday morning. Skai television reported as much as 1 billion euros was withdrawn.
Greek bank deposits shrank by 30 billion euros between January and May this year to 129.9 billion euros, according to data released by Bank of Greece on its website on Thursday.

ECB Blow

The ECB delivered its blow on Sunday afternoon, freezing the ceiling on Emergency Liquidity Assistance to Greek lenders at just below 89 billion euros and refusing for the first time this year to maintain a buffer as deposits sank.

Tsipras moved to bolster confidence and focus blame on his creditors, who have demanded continued austerity after extending 240 billion euros in bailout commitments since 2010.
“The dignity of the Greek people in the face of blackmail and injustice will send a message of hope and pride to all of Europe,” he said in a televised statement, maintaining the confrontational tone that has characterized his six-month old government.

While Tsipras and his government urged a “no” vote in the referendum, he repeated his request to the European Commission to extend the bailout at least until the ballot.

–With assistance from Nikos Chrysoloras and Theophilos Argitis in Athens.

To contact the reporters on this story: Jenny Paris in Athens at jparis20@bloomberg.net; Christos Ziotis in Athens at cziotis@bloomberg.net; Paul Tugwell in Athens at ptugwell1@bloomberg.net To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net Flavia Krause-Jackson, Rosalind Mathieson