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Greece debt crisis: Will EU leaders choose Grexit? Greece debt crisis: Are Greeks heading for Grexit?
(2 days later)
Greece's exit from the eurozone - a "Grexit" - 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 - a "Grexit" - has become a genuine possibility, as eurozone leaders decide whether to agree a third bailout.
Greek banks are shut and almost out of cash. Greek banks are shut, almost out of cash and days away from collapse.
But Prime Minister Alexis Tsipras has sent a last-minute reform plan to Greece's creditors, bowing to many of their demands, in the hope of getting a third eurozone bailout worth €35bn (£25bn: $39bn). Prime Minister Alexis Tsipras has promised widespread reform in return for a three-year loan of €53.5bn (£38.4bn; $59.47bn).
The plan calls for more austerity - targets that were rejected by more than 60% of Greeks in a referendum last Sunday. So it is a big gamble for Mr Tsipras - and there is already some dissent in his leftist Syriza party. But the EU and IMF say Greece will need far more than that and eurozone finance ministers say even before a deal is considered Greece needs to pass legislation by 15 July.
And will it be enough to convince the EU that Greece should remain in the euro? Without a bailout deal Greece will tumble out of the eurozone.
What are the scenarios?What are the scenarios?
Scenario one: Failed deal leads to Grexit Simply put, Greece will stay in or will leave the euro, either permanently or at least temporarily.
Even though Alexis Tsipras was adamant that the Greek "No" in the 5 July referendum was "not a mandate of rupture with Europe", several EU leaders had already warned beforehand that that would be the result. In
Greece's new reform package - including crucial tax and pension reforms - now faces tough scrutiny by eurozone finance ministers and EU leaders, who are to hold an emergency summit in Brussels on Sunday. Temporary Grexit
Peston: Athens capitulates to creditors Out
All previous reform packages offered by the Syriza government have been rejected. Scenario one: Greece stays in
Many sharp words have been exchanged, though the tone has improved since Euclid Tsakalotos replaced Yanis Varoufakis as Greek finance minister. This is a tall order, but France and Italy are among those pushing for Greece to stay in. First the Greek government and parliament would have to agree tougher reforms, days after MPs ratified a package put to the eurozone by Prime Minister Alexis Tsipras.
European Commission President Jean-Claude Juncker has warned that a detailed "Grexit scenario" has already been prepared. Buoyed by a "No" vote on an earlier EU plan, Mr Tsipras called for a new bailout in return for crucial tax and pension reforms. Seventeen coalition MPs did not back the plan and another 15 held their noses. So he would have to rely on opposition parties to get any new eurozone reforms through.
Even if a deal is approved, it would still have to get past the German Bundestag (parliament), and the mood among German members of parliament is very negative. Senior figures in his left-wing Syriza-led government, including Parliament Speaker Zoe Constantopoulou and Energy Minister Panagiotis Lafazanis, already appear hostile.
"Without solidarity and reforms it's not possible to go where we want to go," German Chancellor Angela Merkel has said. Even then, parliaments in Germany and Finland have to agree to new bailout talks starting. And if the negotiations conclude successfully, eight eurozone parliaments have to give the green light to a deal.
Failure on Sunday really could spell Grexit for Greece - the EU says Sunday is the final deadline. Greek banks are perilously close to insolvency. Under any deal there will have to be short-term bridge financing to cover Greece's immediate economic and debt repayments needs, as well as European Central Bank (ECB) help to reopen the banks and restore liquidity.
One potential option for the banks would be to reopen with a parallel currency before the revival of Greece's former currency, the drachma. Scenario two: Greece leaves euro temporarily
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. It had been thought this proposal from the German finance ministry was not even on the table. But it is now becoming a credible option, even if France's President Francois Hollande has said there is "no such thing as temporary Grexit".
Greece could also maintain two euro currencies, 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. Details are sketchy but Greece would be offered "swift negotiations on a time-out from the euro area, with possible debt restructuring". The temporary Grexit would last at least five years.
How easy is it to swap currencies? The German proposal is clear that "sufficient debt restructuring" is not possible within the eurozone. As part of the "time-out" solution, there would be technical and humanitarian assistance. But no mention is made of debt relief, which the International Monetary Fund believes is necessary.
Scenario two: Greek bank collapse leads to Grexit... or a deal What is not clear is whether Greece would move to a different currency or still use the euro, while not being part of the eurozone.
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. Scenario three: Greece leaves eurozone
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. There are so many pitfalls for eurozone negotiators in the coming days and trust in the Greek government is at such a low level that Grexit has become a realistic option.
Germany's Bundesbank Chairman Jens Weidmann has already stressed that the ECB should not provide further support until a bailout deal is reached. Even if Mr Tsipras's ministers and parliament do all that is asked of them, they still have to rely on Finnish and German MPs to vote for bailout talks to go ahead.
So if no deal is agreed on Sunday, then a bank collapse becomes more likely. And that could push Greece out of the euro. Greece's financial system has ground to a halt and without urgent temporary financing it is hard to see how the country can remain in the eurozone.
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. The banks have been shut since 29 June, when the ECB froze their lifeline. It has not increased its support (Emergency Liquidity Assistance) since then.
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 default on a June debt repayment to the IMF. Amid all the talk of a temporary deal is a key deadline on 20 July, when Greece faces a €3.5bn debt repayment to the ECB.
Scenario three: EU leaders agree deal and avert bank collapse
For a deal to be agreed, eurozone partners will have to accept the revamped Greek proposals, which involve a three-year loan from the European Stability Mechanism (ESM).
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 Mr Varoufakis, whose colourful rhetoric infuriated eurozone colleagues, suggests he is taking a more diplomatic approach.
The new reform package is very close to what was being demanded by Greece's eurozone and IMF creditors.
But now Mr Tsipras is asking for a third bailout worth €35bn from the ESM, not the final slice of the second bailout, which was €7.2bn.
After months of acrimonious talks many EU politicians doubt Greece's ability or willingness to root out tax evasion and cronyism.
Shortly before the Greek referendum a report from the IMF said Greece needed significant debt relief. But the government's new reform package does not mention debt relief.
That could make a third bailout more likely, as Germany has rejected imposing any "haircut" on Greece's creditors. Bailout countries must stick to the eurozone rules, Germany has insisted all along.
Did Tsipras change course?
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.
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.
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.
What are capital controls?What are capital controls?
So how would Grexit work? If Greece left the eurozone, what currency would it use?
If Greece were to fall out of the euro, 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. This method could also be used if Greece were to leave the eurozone on a temporary basis.
Greece could also maintain two euro currencies, with the euro used for transactions and the government paying salaries and pensions in a separate Greek-style euro or even in IOUs.
How easy is it to swap currencies?
What would Grexit look like?
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.
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. Why are Greece's finances in such dire straits?
Greece would struggle to find creditors outside Europe - Schaeuble Could Grexit harm the rest of the eurozone?
Could this instability spread across Europe? The EU has worked hard to cordon off the banking difficulties of one member state from the other 27.
The EU 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. But the Greek debt crisis is widely seen as the biggest threat to the eurozone so far and there is concern that creating a precedent could cause irreparable damage to the single currency project.
A Grexit could spook global markets and turn speculators' attention to other fragile eurozone economies. It would leave the ECB with losses of €118bn lent to Greek banks and €20bn spent on buying up Greek government bonds.A Grexit could spook global markets and turn speculators' attention to other fragile eurozone economies. It would 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