Greece has 5 days to save its place in Europe


Bank of Greece Merkel

Christopher Furlong/Getty Images

A sign outside the Bank of Greece is defaced with graffiti to read 'Banque de Merkel' on July 6, 2015 in Athens, Greece.

After the shockingly large victory for the No campaign against Greece's bailout deal with Europe, the country has just days to reach some sort of deal that will keep it in the eurozone - or it will painfully tumble out of the currency union.


The real crunch point identified for some time now is a €3.5 billion ($3.85 billion, £2.50 billion) payment due to the European Central Bank (ECB) on July 20. Greece needs to seal a deal ahead of that, with time to spare to get political agreement from parliaments in Athens and Berlin.

So according to the Financial Times, the clear message from EU leaders is that the government has until Sunday to reach a deal - or Grexit (Greek exit from the euro) is all but inevitable. European Council President Donald Tusk said the bloc could face "the most critical moment in our history" if a deal wasn't done.

After the referendum, almost everyone seemed to change their mind and began to regard Grexit as the most likely scenario.

There are good reasons to think that any deal would now be less generous to Greek Prime Minister Alexis Tsipras than it was before the referendum. Here's Deutsche Bank strategist George Saravelos:


Our best guess is that creditor demands are likely to be more strict than under the prior EFSF (European Financial Stability Facility) proposals: on the one hand, Greece's macroeconomic conditions have deteriorated. On the other hand, these commitments will need to refer to a potential third ESM (European Stability Mechanism) program spanning over a longer time horizon and with greater financing needs.

So the two positions have, if anything, widened from where they were a month ago. In Greek politics, Tsipras is now riding high. He's as powerful as he's ever been, having won both the election in January with a higher proportion of the vote than polls suggested, and overwhelmingly triumphed in Sunday's referendum.

As a result, he simply can't accept a deal even less generous than ones he's already campaigned against, both earlier this year and since the first bailout in 2010. It would have been hard enough to get internal political agreement for what was presented before - now that Syriza has had such an impressive victory, it would be disastrous.

Europe is no closer to offering debt haircuts for Greece than it was before the referendum, but the pressure is now much heavier on the government to get some major concession.

Without a deal, the deadline for that debt repayment to the ECB on July 20 will be missed. The ECB also provides the Greek banking system's lifeline in the form of Emergency Liquidity Assistance (ELA). It kept providing that assistance (though didn't increase its level) even after Athens failed to make its International Monetary Fund payment on June 30.


But it won't be able to turn a blind eye to a eurozone government actually defaulting on a debt that's owed directly to Frankfurt. That puts the already-chaotic Greek financial system under terrible risk.

To avoid it, the government could start issuing scrip - a sort of parallel, coupon-like currency. They could pay wages and pensions with that, require that retailers accept it, and save the actual euros for debt repayments.

But it's easy to see how this would be the first concrete step to Grexit. People would want euros rather than the parallel currency, so even when the government pegged the value to the euro, a black market would almost certainly emergence in which it was worth less. At that point, the parallel currency might as well be named the drachma.

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