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Greek debt crisis: Is Grexit inevitable? Greek debt crisis: Is Grexit inevitable?
(about 20 hours later)
Greek banks have been closed and strict limits placed on cash withdrawals and Greece's government has failed to make a debt repayment to the IMF of €1.5bn ($1.7bn; £1.06bn) due on 30 June. Greek banks have been closed and strict limits placed on cash withdrawals after the prime minister called a 5 July referendum that some say could propel Greece out of the euro.
Months of negotiations on a bailout deal have collapsed and Prime Minister Alexis Tsipras has called a referendum for 5 July. He is asking Greeks to reject reform proposals from the IMF and EU, which he says are against European values. Months of negotiations on extending Greece's cash-for-reforms deal with the eurozone have collapsed, so the Greek bailout ran out on 30 June and Alexis Tsipras's government failed to make a key debt repayment to the IMF of €1.5bn ($1.7bn; £1.06bn).
The European Central Bank (ECB) has said it won't extend emergency funding for the banks and there is a growing risk of Greece lurching out of the single currency - which has come to be known as Grexit.The European Central Bank (ECB) has said it won't extend emergency funding for the banks and there is a growing risk of Greece lurching out of the single currency - which has come to be known as Grexit.
Why was missing the 30 June deadline so important? Why is Greece in danger of leaving the euro?
When it failed to make its lMF debt repayment on 30 June, Greece became the first developed economy to do so. Technically, the IMF says Greece is "in arrears" and will not declare it in default for some time. Although Prime Minister Alexis Tsipras disagrees, several European leaders have warned that a "No" vote in Sunday's referendum on a bailout deal with the eurozone would spell an end to Greece's participation in the single currency.
But the deadline also coincided with the end of Greece's bailout deal with the eurozone, which is keeping the economy afloat. Greece's last cash injection from international creditors was back in August 2014, so the Athens government desperately needs a new lifeline.
Greece's last cash injection from international creditors was way back in August 2014, so the final €7.2bn instalment from its two EU-IMF bailouts is now vital. That lifeline is in trouble. The five-year eurozone bailout that had been keeping the Greek economy afloat expired on 30 June. And, on the same day, Greece became the first developed economy to miss an IMF payment. Technically, the IMF says Greece is "in arrears" and will not declare it in default for some time.
Mr Tsipras has been trying to strike a deal with Greece's creditors since he came to power in late January, but repeated attempts to come to an agreement have failed. But it was the ECB's decision on 28 June to freeze its €89bn emergency cash programme of keeping the banks running on 28 June (Emergency Liquidity Assistance) that prompted Greece's capital controls and cash crisis.
Greece appealed for the bailout terms to be extended to cover the referendum but its European partners have refused to extend the programme without a cash-for-reforms deal. Without a eurozone deal to resolve the impasse, its future in the euro is looking bleak.
As Greeks rushed to remove their savings, the ECB announced it would not extend its programme of keeping the banks running through an €89bn cash fund known as Emergency Liquidity Assistance (ELA).
Facing a cash crunch, the government has imposed capital controls limiting cash machine withdrawals to €60 a day.
Greece's government, recommending a no-vote on creditors' reforms, is staring at default, sooner or later.
Lenders' proposals - key sticking pointsLenders' proposals - key sticking points
Source: European Commission document, 26 Jun 15 (pdf)Source: European Commission document, 26 Jun 15 (pdf)
Are Greece's coffers really bare? How bare are Greece's coffers?
Greece has promised to pay €2.2bn in public sector salaries, pensions and social security. Not only are the banks shut, Greeks are limited to €60 cash withdrawals per day.
But there seems little doubt that Greece's cash-flow is running on empty. 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.
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.
The mayor of Greece's second city, Thessaloniki, handed over millions, but other towns and cities have refused to pay up.The mayor of Greece's second city, Thessaloniki, handed over millions, but other towns and cities have refused to pay up.
Does failure to reach a deal mean leaving the eurozone? What are the restrictions imposed in Greece?
There is no precedent for a country to leave the euro and no-one knows how it might happen. But a No vote on 5 July would most likely push Greece towards the exit door. What are capital controls?
Greek Finance Minister Yanis Varoufakis was adamant there was no provision for any country to leave the euro, and he said the 5 July referendum was not about Grexit. So is Grexit a realistic prospect?
There is no precedent for a country to leave the euro and no-one knows how it might happen. But a "No" vote on 5 July would most likely push Greece towards the exit door.
Greek Finance Minister Yanis Varoufakis is adamant there is no provision for any country to leave the euro. He insists the 5 July referendum is not about Grexit but about sending a powerful message on the need for restructuring Greece's mammoth debt, now totalling more than €300bn - around 180% of its GDP.
Even if Greece does default on its debt there is no legislation requiring its expulsion, as ECB Vice President Vitor Constancio said in April.Even if Greece does default on its debt there is no legislation requiring its expulsion, as ECB Vice President Vitor Constancio said in April.
But several European leaders - Italy's Matteo Renzi, Francois Hollande of France and German deputy chancellor Sigmar Gabriel - have said they see the referendum as a choice between staying in the eurozone or leaving it. But several European leaders - Italy's Matteo Renzi, Francois Hollande of France and Germany's vice chancellor Sigmar Gabriel - have said they see the referendum as a choice between staying in the eurozone or leaving it.
The ECB's decision not to raise its emergency cash fund for Greek banks above €89bn already does make Grexit a greater prospect as it suspends the free flow of credit, a key tenet of the single currency. If the IMF were to declare Greece in default, Greek banks would be in even more trouble. The ECB's decision not to raise its emergency cash fund also represents a powerful message, by suspending the free flow of credit, a key tenet of the single currency. If the IMF were to declare Greece in default, Greek banks would be in even more trouble.
Not only must Greece find debt repayments for June, it has a hot summer of instalments owing to the ECB too, with a €3.5bn repayment due on 20 July. If Greece failed to pay that, it would be very difficult for the Frankfurt-based bank to justify propping up the Greek banking system further. If Greece failed to reach a deal by 20 July on its €3.5bn repayment to the ECB, it would be very difficult for the Frankfurt-based bank to justify propping up the Greek banking system at all.
Will the referendum decide Greece's future in the euro?
Whatever Greece's Syriza-led government says, a "No" vote would be seen by Europe's leaders as a rejection of their terms for staying in the single currency.
Alexis Tsipras believes that they would stop short of kicking Greece out as the "cost is immense".
But a "Yes" vote would likely prompt his resignation and spell political turmoil, months after Syriza came to power with an anti-austerity mandate. It would however be a signal to the rest of the eurozone that Greece wanted to stay part of it.
It was perhaps summed up best by the Italian prime minister.
Why a bailout referendum?
So what would Grexit look like?So what would Grexit look like?
Deprived of liquidity, the Athens government would risk a "forced default" on its debts, seen as the worst possible option, which could plunge Greece out of the euro and create a downward spiral.Deprived of liquidity, the Athens government would risk a "forced default" on its debts, seen as the worst possible option, which could plunge Greece out of the euro and create a downward spiral.
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.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.
Relations between Mr Tsipras's government and the rest of the eurozone have all but broken down. The risk is that a messy default could cause even more harm to the Greek economy.Relations between Mr Tsipras's government and the rest of the eurozone have all but broken down. 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 return to its pre-euro currency, the drachma, suffer instant devaluation and inflation and there would be a banking crisis.Greece would return to its pre-euro currency, the drachma, suffer instant devaluation and inflation and there would be a banking crisis.
It could end up a pariah in the international markets for years, much like Argentina in 2002, warns Prof Begg.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.
Unemployment, already steep, could climb further and Greek companies would close, Prof Kousenidis believes.Unemployment, already steep, could climb further and Greek companies would close, Prof Kousenidis believes.
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.
Could Greece default and remain in the euro? Could Greece remain in the euro after a 'No' vote?
It might seem unlikely at the moment, but even without a deal with Greece's international creditors, there could be an arrangement that maintains the eurozone's lifeline to Athens and avoids a messy default.It might seem unlikely at the moment, but even without a deal with Greece's international creditors, there could be an arrangement that maintains the eurozone's lifeline to Athens and avoids a messy default.
For a start, opinion polls in Greece suggest that while the government's anti-austerity policies are popular, there is still majority support for staying in the eurozone. A yes vote, in defiance of the government's recommendations, is possible.
For some economists, potentially the best option would be for Greece to pursue a "managed default".For some economists, potentially the best option would be for Greece to pursue a "managed default".
Capital controls are already in place to stop money flooding out of Greece. A parallel currency to the euro could operate with civil servants paid with IOUs. But few economists see that as workable and the most likely outcome would be an eventual return to the drachma.Capital controls are already in place to stop money flooding out of Greece. A parallel currency to the euro could operate with civil servants paid with IOUs. But few economists see that as workable and the most likely outcome would be an eventual return to the drachma.
It would be less messy, but it would be a Grexit.It would be less messy, but it would be a Grexit.
Greece would struggle to find creditors outside Europe - SchaeubleGreece would struggle to find creditors outside Europe - Schaeuble
Is there a risk of contagion?Is there a risk of contagion?
The European Union has worked hard to cordon off the banking difficulties of one member state from the other 27.The European Union has worked hard to cordon off the banking difficulties of one member state from the other 27.
But the IMF has warned that "risks and vulnerabilities remain" and the greater the talk of Grexit, the more nervous the markets become.But the IMF has warned that "risks and vulnerabilities remain" and the greater the talk of Grexit, the more nervous the markets become.
Default would mean a steep loss for the ECB, which has already lent €118bn to Greek banks and has spent €20bn on buying up Greek government bonds.Default would mean a steep loss for the ECB, which has already lent €118bn to Greek banks and has spent €20bn 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.
Spanish Prime Minister Mariano Rajoy recently said he was not worried by contagion from Greece. He has now changed his view.
"What would happen if Greece came out of the euro? There would be a negative message that euro membership is reversible," he said.
Greeks see cash run out in undeclared defaultGreeks see cash run out in undeclared default