16 Jun 2015

Deal or turmoil: a guide to what’s happening in Greece

With negotiations between Greece and its lenders stalled, but the differences amounting to around 0.6 per cent of Greek GDP, the stage is set for either a last-minute deal or a breakdown.

The pressure on Greece has been upped with a report in the German press that the EU is prepared to suspend Greek access to the Eurosystem’s Target2 payment mechanism, in order to force it to implement capital controls – i.e. restrictions on ATM withdrawals and transfers out of the country.

greek decision tree

Nobody is sure whether this would be legal, but in any case, the ECB also has a whip hand over Greece and could at any point withdraw its support for the Greek banks, which would then need a bailout that involved confiscating deposits above a certain threshold (known as a bail in).

Greek eurozone crisis: is time running out for Syriza?

However the risks to both strategies are large, because they would both be seen as imposing economic hardship on a country that the ECB is supposed to be regulating, and could massively bolster support for Syriza among the nationalist and conservative sectors of the Greek electorate.

Greece’s hand includes (a) the threat to default on €320bn largely owed to German and French taxpayers, (b) the massive hit to the ECB’s credibility and the Eurozone’s stability that would ensue. It should also be noted that Greece could attempt to conclude a separate deal with the IMF following a partial default, throwing into sharp contrast the EU’s management of the situation.

A further complication is the imminent declaration (Wednesday) by the Greek parliamentary debt truth commission that some or all of the debt is illegal. This would lead to cases in the European courts and give Greece a potential legal argument in favour of suspending payments.

I’ve mapped this all out as a decision tree. It’s stark – and it represents the crisis scenarios in greater detail than the calmer outcomes.

It’s very hard to look at it and not worry about the future of 11 million people who thought, by signing up to the Euro, they had guaranteed their country’s economic stability.

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