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Greece debt crisis: Has Grexit been avoided? Greece debt crisis: Has Grexit been avoided?
(3 days later)
Eurozone leaders have agreed to the conditions for Greece to seek a third bailout - but its exit from the eurozone, a "Grexit", remains a genuine possibility. Greece has negotiated a eurozone deal for a possible third bailout - but that does not mean its future in the single currency is guaranteed.
Greek banks are shut, almost out of cash and days away from collapse. Short-term financing is being arranged to help Greece survive the next few days and emergency funding will enable the banks to reopen for the first time since June.
The deal on the table is for up to €86bn (£61bn) of financing for Greece over three years. But the bailout has been widely criticised and there are many voices still arguing that Greece should leave the eurozone, also known as a "Grexit".
But short-term financing is vital to keep the banks going and pay the government's bills and Greek MPs have been given an ultimatum to rush through a slew of reforms. Has the immediate threat of Grexit gone?
If the bailout deal fails Greece will tumble out of the eurozone. For now, the threat of a Grexit is diminished. But it was a genuine possibility in the hours before the 13 July bailout deal was hammered out. Since then, Greece has successfully negotiated the first hurdles put up by its eurozone partners.
What are the scenarios? The most important obstacle was in the Greek parliament, where the Syriza-led government survived a rebellion and pushed through tough reforms on VAT, pensions and early retirement which eurozone partners said were an immediate test for the government to pass.
Simply put, Greece will stay in or will leave the euro, either permanently or at least temporarily. That triggered a deal on €7bn in emergency funding, which will help the government pay its arrears with the International Monetary Fund and its July bill from the European Central Bank (ECB).
In Significantly, it has also prompted the ECB to lift its limit on emergency cash assistance for Greek banks, which could reopen on Monday, three weeks after they were shut.
Out Will Greece return to normal?
Temporary Grexit Not for a while, and it depends on weeks of negotiations on the terms of the third bailout.
Scenario one: Greece stays in Capital controls, imposed when the ECB froze emergency liquidity assistance for the banks (ELA), are unlikely to be lifted for some time. So while the banks are set to reopen, cash withdrawals will still be limited to €60 a day.
Eurozone leaders have signed up to a deal for Greece to stay in the euro, but it calls for more Greek austerity, and it will be a huge task. The reality is that Greece has not been normal for several years. The financial crisis hit Greece and its banks hard. The jobless rate is above 25% and youth unemployment is as high as 50%.
First the Greek government and parliament will have to agree the eurozone's toughened package of reforms, days after MPs ratified a package put to the eurozone by Prime Minister Alexis Tsipras.
And this is a major obstacle for the Greek leader, as 17 coalition MPs did not back his initial plan and another 15 held their noses. So he will have to rely on opposition parties to get any new eurozone reforms through.
Senior figures in his left-wing Syriza-led government, including Parliament Speaker Zoe Constantopoulou and Energy Minister Panagiotis Lafazanis, already appear hostile.
Even if he is successful, parliaments in Germany and Finland have to agree to new bailout talks starting. And then, if the negotiations conclude successfully, eight eurozone parliaments have to give the green light to a bailout agreement.
Short-term bridge financing is needed to cover Greece's immediate economic and debt repayment needs, as well as European Central Bank (ECB) help to reopen the banks and restore liquidity.
Scenario two: Greece leaves eurozone
Despite the eurozone deal, there are so many pitfalls over the coming days that Grexit remains a realistic option.
Even if Mr Tsipras's ministers and parliament do all that is asked of them, they still have to rely on the bailout terms being agreed and approval from parliaments elsewhere.
Greece's financial system has ground to a halt and urgently needs temporary financing to prevent a bank collapse.
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 and expects a €3.5bn debt repayment on 20 July.
Falling out of the eurozone by accident now seems unlikely, but much still rests on the haggling to be done across the eurozone.
What are capital controls?What are capital controls?
Scenario three: Greece leaves euro temporarily How big is the risk of Grexit?
It had been thought this proposal from the German finance ministry was not even on the table. But it then appeared in a draft document to be considered by eurozone leaders, who ultimately rejected it. If negotiations fall through, Greece could still leave the single currency.
And yet, if the third bailout falls through, it might become a credible option. Prime Minister Alexis Tsipras said he was unhappy with the bailout deal he negotiated with other eurozone leaders but he was faced with a clear choice: "A deal we largely disagreed with, or a chaotic default."
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. So there is a chance a government that does not believe in a bailout deal and that relied on opposition MPs to get it past parliament might not last to see it through.
The German proposal argued that "sufficient debt restructuring" was not possible within the eurozone, although it does appear to be part of the Brussels agreement. There are plenty of politicians and economists who believe Greece should leave the euro, most notably German Finance Minister Wolfgang Schaeuble, who believes Greece needs debt relief, which is not seen as legal within the single currency.
The "time-out" solution would include technical and humanitarian assistance but not debt relief, which the International Monetary Fund believes is necessary. But at a European level, politically the decision appears to have been taken to do what it takes to keep Greece in. And for now Mr Schaeuble's arguments have been over-ruled.
France's President Francois Hollande has said there is "no such thing as temporary Grexit", and he is probably right. For Greece the idea of leaving and then returning would be all but impossible. Austria's centre-left Chancellor Werner Faymann has said it would be "totally wrong" for Greece to leave, and ECB Chairman Mario Draghi has been even clearer. The ECB's mandate was, he said, "to act based on the assumption that Greece is and will be a member of the euro area".
If Greece left the eurozone, what currency would it use? What about a temporary Grexit?
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. This was an idea put forward by Mr Schaeuble, who called for a Greek "time-out from the euro area", enabling the Athens government to restructure its debts.
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. He and many others believe Greek debt is unsustainable and that a debt write-off - a "haircut" - would make more sense outside the euro as it is not allowed inside it.
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. A time-out was discussed by eurozone leaders, but the terms of re-entering the eurozone are so stringent that a time-out would in reality have become permanent. For France's President Hollande, there is "no such thing as temporary Grexit".
How easy is it to swap currencies? Schaeuble - man with a Grexit plan
Would Grexit make more sense than staying in?
Certainly, there is a clear attraction for many Greeks of abandoning the euro, when faced with many more years of eurozone austerity and a new debt burden of €86bn (£62bn).
But it all depends on whether or not Greece is allowed to restructure its debts.
The International Monetary Fund revealed it had warned eurozone leaders that Greece's debt would peak at 200% of GDP, far higher than previous estimates. Its "dramatic deterioration in debt sustainability" required debt relief "on a scale that would need to go well beyond what has been under consideration to date".
The only reference to potential debt relief in the eurozone deal is of "possible longer grace and payment periods". And Germany's Angela Merkel said there was a plan to consider restructuring later in the year, after the "first review" of the bailout.
The European Commission said "a very substantial debt re-profiling" was possible if Greece kept to agreed reforms. However a debt write-off was not on the cards.
Greece's former Finance Minister Yanis Varoufakis certainly believes it will not happen.
Would Grexit have been a better deal?
What would Grexit look like?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.
The problem 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. However, Yanis Varoufakis gave an illuminating idea of the initial steps he had planned for Greece to take towards Grexit in preparation for when the ECB cut off emergency funding for Greek banks.
His colleagues rejected the plan.
The problem for Greece 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.
Greece would suffer instant devaluation and inflation. It could end up a pariah in the international markets for years, much like Argentina in 2002.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.
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?
Why are Greece's finances in such dire straits?Why are Greece's finances in such dire straits?
Could Grexit harm the rest of the eurozone?
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 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.
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.
Greeks see cash run out in undeclared default