Today will be a crucial day, as EU leaders meet Greek prime minister Alexis Tsipras to see if they can kickstart negotiations on a new bailout deal. Here are the key issues which now need to be sorted out if Greece is not to slide inevitably towards euro exit:
1 Funds for the Greek banks. The banks were closed last week and the government announced that they would remain closed until at least Wednesday. The European Central Bank (ECB) is providing emergency funds to the banks. The ECB announced yesterday that it had left the amount unchanged at just over €89 billion, but it also said it would demand a bigger discount on the collateral that Greek banks must pledge in return for access to funds.
Provided banks have spare collateral, this may not have an immediate impact, but it does send a signal of increasing ECB concern about the financial position of Greece itself and the knock-on implications of this for its banks. And it means for the moment that the banks stay shut, until at least Thursday and possibly much longer, given their drastic shortage of cash. The ECB is expected to review the position tomorrow, which will put pressure on the EU summit to show some progress.
If the banks are to reopen, additional funds will be needed, but for this to happen the ECB will need a clear political signal that a new bailout deal is in negotiation. Even then, with the financial system damaged, it is not clear how quickly the banks could reopen and when limits on withdrawals could be lifted. As well as liquidity to let them reopen, some of the banks will probably require new capital, and rebuilding trust in the financial system will be a huge challenge.
2 Political agreement on the framework for a new bailout. This will not be easy, given the bad blood between the two sides and the domestic political pressures faced by both the Greek negotiators and those from the creditor countries. Reports suggest that a deal was not far off before the referendum was called, but Tsipras, emboldened by the No vote, will presumably seek additional concessions, particularly on some kind of relief of Greece's national debt burden. Meanwhile, many of the creditor countries, particularly Germany, continue, in public at least, to take a hard line. The summit today should indicate whether there is a basis for talks. In turn, this will feed into the ECB's decision on whether it can continue to support the Greek banks, and on what basis it can do so.
3 The details of a plan. If the talks get started for real, it will again be a question of the detail. Central to this will be the Greek public finances and what targets are set for the next few years, in terms of the size of the budget surplus before debt relief. This will indicate what is needed in terms of budget adjustments. Then the detail will come into play. The speed of pension reform has been a key sticking point, as well as the restructuring of VAT and, in particular, what rates should apply to tourism, to the Greek islands and to essentials such as medicine.The creditors were also unhappy with the balance of measures suggested by Greece, believing it was too heavily focused on tax increases and not enough on spending cuts. A range of other reforms have also been on the table, but time will be short now to get into the detail. Meanwhile, Tsipras will seek agreement on debt relief, more likely a restructuring of repayments as opposed to an actual write-down.
4 A path forward. A crucial issue for the EU leaders as they meet is how to organise what needs to be done if they do want to keep Greece in the euro zone. Greece faces a number of debt repayments over the next couple of weeks and a €3.5 billion repayment to the ECB on July 20th. Its financial system urgently needs to be rescued if economic damage is not to spread, but the ECB will want assurances of the solvency of Greece and its banks if this is to happen. Meanwhile, a number of European parliaments need to approve any deal. In short, there are huge logistical and timing problems, as well as the obvious political ones. If no bailout can be agreed, then the question is on what basis will the EU assist Greece as it leaves the euro zone and how will that whole process be managed.