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Greece debt crisis: Will EU leaders choose Grexit? Greece debt crisis: Will EU leaders choose Grexit?
(about 17 hours later)
Greece's exit from the eurozone has become a genuine possibility, as European Union leaders prepare for a final decision at a summit on Sunday.Greece's exit from the eurozone has become a genuine possibility, as European Union leaders prepare for a final decision at a summit on Sunday.
Greek banks are shut and almost out of cash. And Prime Minister Alexis Tsipras has been given an ultimatum to produce cash-for-reform proposals, after more than 60% of Greeks voted to reject a eurozone bailout plan.Greek banks are shut and almost out of cash. And Prime Minister Alexis Tsipras has been given an ultimatum to produce cash-for-reform proposals, after more than 60% of Greeks voted to reject a eurozone bailout plan.
So what happens next? Will Greece convince its partners that it should remain in the euro or will it lurch out of the single currency - which has come to be known as Grexit?So what happens next? Will Greece convince its partners that it should remain in the euro or will it lurch out of the single currency - which has come to be known as Grexit?
What are the scenarios?What are the scenarios?
Scenario one: Failed deal leads to GrexitScenario one: Failed deal leads to Grexit
This is now seen by many as the most likely option, with a mood of resignation spreading among Europe's most senior leaders.This is now seen by many as the most likely option, with a mood of resignation spreading among Europe's most senior leaders.
Even though Alexis Tsipras was adamant that the Greek "No" to eurozone reforms on 5 July the result was "not a mandate of rupture with Europe", several EU leaders had already warned beforehand that that would be the result.Even though Alexis Tsipras was adamant that the Greek "No" to eurozone reforms on 5 July the result was "not a mandate of rupture with Europe", several EU leaders had already warned beforehand that that would be the result.
Greece is now putting together tax and pension reforms as part of a request for a third bailout deal. It has to be approved by creditors and eurozone finance ministers, as well as by leaders meeting at an EU summit on Sunday.Greece is now putting together tax and pension reforms as part of a request for a third bailout deal. It has to be approved by creditors and eurozone finance ministers, as well as by leaders meeting at an EU summit on Sunday.
All previous reform packages offered by the left-wing Syriza-led government have been rejected so optimism is in short supply and European Commission President Jean-Claude Juncker has warned that a detailed "Grexit scenario" has already been prepared.All previous reform packages offered by the left-wing Syriza-led government have been rejected so optimism is in short supply and European Commission President Jean-Claude Juncker has warned that a detailed "Grexit scenario" has already been prepared.
Even if a deal is approved it would still have to get past the German Bundestag, and the mood among German MPs is very negative.Even if a deal is approved it would still have to get past the German Bundestag, and the mood among German MPs is very negative.
"Without solidarity and reforms it's not possible to go where we want to go," German Chancellor Angela Merkel has said."Without solidarity and reforms it's not possible to go where we want to go," German Chancellor Angela Merkel has said.
A failed deal on Sunday really could spell Grexit for Greece.A failed deal on Sunday really could spell Grexit for Greece.
One potential option for the banks would be to reopen with a parallel currency before the revival of Greece's former currency, the drachma.One potential option for the banks would be to reopen with a parallel currency before the revival of Greece's former currency, the drachma.
Another would be to place Greece in a type of eurozone quarantine, where it would use the euro but not be a fully-fledged part of it. After all, Kosovo and Montenegro have adopted the euro without being inside the eurozone.Another would be to place Greece in a type of eurozone quarantine, where it would use the euro but not be a fully-fledged part of it. After all, Kosovo and Montenegro have adopted the euro without being inside the eurozone.
Greece could also maintain a parallel currency, with the euro used for transactions and the government paying salaries and pensions in a separate Greek-style euro. Devaluation of the parallel currency would then be inevitable, but it would not be Grexit.Greece could also maintain a parallel currency, with the euro used for transactions and the government paying salaries and pensions in a separate Greek-style euro. Devaluation of the parallel currency would then be inevitable, but it would not be Grexit.
Scenario two: Greek bank collapse leads to Grexit... or a dealScenario two: Greek bank collapse leads to Grexit... or a deal
Overshadowing any political deal is the state of Greece's banks, which were shut on 29 June when the European Central Bank (ECB) froze their lifeline.Overshadowing any political deal is the state of Greece's banks, which were shut on 29 June when the European Central Bank (ECB) froze their lifeline.
The Greek government had hoped to reopen the banks this week. But the ECB has not raised its emergency cash support (Emergency Liquidity Assistance) from €89bn (£63bn; $98bn) and the banks' survival is being numbered in days.The Greek government had hoped to reopen the banks this week. But the ECB has not raised its emergency cash support (Emergency Liquidity Assistance) from €89bn (£63bn; $98bn) and the banks' survival is being numbered in days.
Peston: Greek banks days from running out of cashPeston: Greek banks days from running out of cash
The Greek economy is in such a state that French ECB member Christian Noyer has warned of it being on the verge of catastrophe. If the banks do manage to stumble through until Sunday, without a eurozone deal he predicts the Frankfurt-based bank will cut off liquidity. If the banks do manage to stumble through until Sunday, without a eurozone deal they may struggle to survive.
But what if the banks collapse before then? Germany's Bundesbank Chairman Jens Weidmann has already stressed that the ECB should not provide further support until a bailout deal is reached.
The threat of Greece's economy going into freefall could persuade the EU to recapitalise the banking system and patch together a deal. But that would have knock-on political consequences for other eurozone countries such as Spain, where the political mainstream is facing a stiff electoral challenge from anti-austerity parties. So if no deal is agreed on Sunday, then a bank collapse becomes more likely.
Greece's biggest creditor, the eurozone rescue fund EFSF, has already threatened to call in the €130.9bn owed by the Athens government, because of its failure to pay its June debt repayment to the IMF. That could lead to Greece falling out of the euro, or the seriousness of the situation could persuade the Greek government to soften its demands.
Without a deal, it seems unlikely that the Greek government could survive beyond 20 July, when it faces a €3.5bn debt repayment to the ECB.
On top of that, Greece's biggest creditor, the eurozone rescue fund EFSF, has already threatened to call in €130.9bn owed by the Athens government, because of its failure to pay its June debt repayment to the IMF.
Scenario three: EU leaders agree deal and avert bank collapseScenario three: EU leaders agree deal and avert bank collapse
For a deal to be agreed, eurozone partners will have to accept revamped Greek proposals, which involve a three-year loan from the European Stability Mechanism (ESM).For a deal to be agreed, eurozone partners will have to accept revamped Greek proposals, which involve a three-year loan from the European Stability Mechanism (ESM).
First the ECB, IMF and European Commission will have to pore through the detail, and then finance ministers will spend late Friday and Saturday analysing whether there has been any real change.First the ECB, IMF and European Commission will have to pore through the detail, and then finance ministers will spend late Friday and Saturday analysing whether there has been any real change.
If a deal is agreed, there will have to be short-term bridge financing to cover Greece's immediate economic and debt repayments needs, as well as ECB help to reopen the banks and halt capital controls. That could come from profits made by the ECB on Greek bonds.If a deal is agreed, there will have to be short-term bridge financing to cover Greece's immediate economic and debt repayments needs, as well as ECB help to reopen the banks and halt capital controls. That could come from profits made by the ECB on Greek bonds.
Certainly Mr Tsipras speaks as if he wants a deal. And his decision to dispense with Finance Minister Yanis Varoufakis, whose colourful rhetoric infuriated eurozone colleagues, suggests he is taking a more diplomatic approach.Certainly Mr Tsipras speaks as if he wants a deal. And his decision to dispense with Finance Minister Yanis Varoufakis, whose colourful rhetoric infuriated eurozone colleagues, suggests he is taking a more diplomatic approach.
The reforms that Mr Tsipras agreed to days before the 5 July referendum were not a far cry from what was being demanded by Greece's eurozone and IMF creditors.The reforms that Mr Tsipras agreed to days before the 5 July referendum were not a far cry from what was being demanded by Greece's eurozone and IMF creditors.
The difference was that he wanted a third bailout worth €29.1bn from the ESM, not the final slice of the second, which was a quarter of the size of the amount now being asked for.The difference was that he wanted a third bailout worth €29.1bn from the ESM, not the final slice of the second, which was a quarter of the size of the amount now being asked for.
He has promised to tackle early retirement in Greece, but for a deal to work he will probably need to accept pension spending cuts and higher VAT.He has promised to tackle early retirement in Greece, but for a deal to work he will probably need to accept pension spending cuts and higher VAT.
What is not clear is whether he will be looking to reduce Greece's debt burden and if so by how much. The Greek finance ministry has spoken only of wanting Greek debt to be made "sustainable and viable over the long term".What is not clear is whether he will be looking to reduce Greece's debt burden and if so by how much. The Greek finance ministry has spoken only of wanting Greek debt to be made "sustainable and viable over the long term".
That might be an attempt to build on a report from the IMF, released just three days before the referendum, which said Greece needed significant debt relief.That might be an attempt to build on a report from the IMF, released just three days before the referendum, which said Greece needed significant debt relief.
Did Tsipras change course?Did Tsipras change course?
Why are Greece's finances in such dire straits?Why are Greece's finances in such dire straits?
Since 2010, the Athens government has been reliant on two EU-IMF bailouts totalling €240bn. Greece's last cash injection from international creditors was back in August 2014, and when the eurozone agreement ran out on 30 June, Mr Tsipras's government also failed to make a key debt repayment to the IMF of €1.5bn.Since 2010, the Athens government has been reliant on two EU-IMF bailouts totalling €240bn. Greece's last cash injection from international creditors was back in August 2014, and when the eurozone agreement ran out on 30 June, Mr Tsipras's government also failed to make a key debt repayment to the IMF of €1.5bn.
Technically, the IMF says Greece is "in arrears" but the EFSF says that constitutes a default.Technically, the IMF says Greece is "in arrears" but the EFSF says that constitutes a default.
Greece's debts now total more than €300bn - about 180% of its GDP.Greece's debts now total more than €300bn - about 180% of its GDP.
Not only are the banks shut, Greeks are limited to €60 cash withdrawals per day.Not only are the banks shut, Greeks are limited to €60 cash withdrawals per day.
Although the government has stopped paying its debts, it has to find €2.2bn a month in public sector salaries, pensions and social security, and the bank restrictions mean its tax revenues are drying up.Although the government has stopped paying its debts, it has to find €2.2bn a month in public sector salaries, pensions and social security, and the bank restrictions mean its tax revenues are drying up.
Credit rating agencies have lowered the banks to near junk status. Public sector bodies - including hospitals - have already been asked to surrender any cash reserves they have.Credit rating agencies have lowered the banks to near junk status. Public sector bodies - including hospitals - have already been asked to surrender any cash reserves they have.
What are capital controls?What are capital controls?
So how would Grexit work?So how would Grexit work?
There is no precedent for a country to leave the euro and no-one knows how it might happen. But the ECB's decision to freeze liquidity to Greek banks felt like an initial step, as free flow of credit is a key tenet of the single currency.There is no precedent for a country to leave the euro and no-one knows how it might happen. But the ECB's decision to freeze liquidity to Greek banks felt like an initial step, as free flow of credit is a key tenet of the single currency.
The trouble is the damage already done to the banks. Tens of billions of euros have already been withdrawn from private and business accounts, and capital controls have left Greeks unable to withdraw large sums of cash.The trouble is the damage already done to the banks. Tens of billions of euros have already been withdrawn from private and business accounts, and capital controls have left Greeks unable to withdraw large sums of cash.
The risk is that a messy default could cause even more harm to the Greek economy.The risk is that a messy default could cause even more harm to the Greek economy.
"A forced default is where the coffers are empty, you stop paying employees and say: 'We're using all our resources to pay the hospital bills,'" says Prof Iain Begg of the London School of Economics."A forced default is where the coffers are empty, you stop paying employees and say: 'We're using all our resources to pay the hospital bills,'" says Prof Iain Begg of the London School of Economics.
Greece would suffer instant devaluation and inflation. It could end up a pariah in the international markets for years, much like Argentina in 2002, warns Prof Begg.Greece would suffer instant devaluation and inflation. It could end up a pariah in the international markets for years, much like Argentina in 2002, warns Prof Begg.
Tourism - one of Greece's main earners - would be hit hard, dealing a hammer blow to an ailing economy.Tourism - one of Greece's main earners - would be hit hard, dealing a hammer blow to an ailing economy.
Some economists believe a return to the drachma could eventually benefit the economy, but it is difficult to see anything positive in the short term.Some economists believe a return to the drachma could eventually benefit the economy, but it is difficult to see anything positive in the short term.
Potentially the best option would be for Greece to pursue a "managed default", where a parallel currency could operate with civil servants paid with IOUs, and eurozone institutions would stave off a fully-fledged crisis.Potentially the best option would be for Greece to pursue a "managed default", where a parallel currency could operate with civil servants paid with IOUs, and eurozone institutions would stave off a fully-fledged crisis.
Greece would struggle to find creditors outside Europe - SchaeubleGreece would struggle to find creditors outside Europe - Schaeuble
Could this instability spread across Europe?Could this instability spread across Europe?
The European Union has worked hard to cordon off the banking difficulties of one member state from the other 27. But the Greek debt crisis is widely seen as the biggest threat to the eurozone so far.The European Union has worked hard to cordon off the banking difficulties of one member state from the other 27. But the Greek debt crisis is widely seen as the biggest threat to the eurozone so far.
The IMF has warned that "risks and vulnerabilities remain" and a sharp fall on markets worldwide is widely expected.The IMF has warned that "risks and vulnerabilities remain" and a sharp fall on markets worldwide is widely expected.
Grexit could leave the ECB with losses of €118bn lent to Greek banks and €20bn spent on buying up Greek government bonds.Grexit could leave the ECB with losses of €118bn lent to Greek banks and €20bn spent on buying up Greek government bonds.
As a central bank, the ECB could simply print the money to recapitalise itself, but that is considered anathema to Germany.As a central bank, the ECB could simply print the money to recapitalise itself, but that is considered anathema to Germany.
But there is more at stake than the markets. Several governments facing anti-euro movements are watching developments in Greece nervously.But there is more at stake than the markets. Several governments facing anti-euro movements are watching developments in Greece nervously.
Greeks see cash run out in undeclared defaultGreeks see cash run out in undeclared default