1. What is the basic situation?

Greece’s bailout agreement expires in eight days, and without an extension of funds, which requires the Greek government to commit to a package of economic and social reforms, the country will be unable to meet its upcoming debt commitments. Greece owes €1.5bn to the IMF at the end of the month. Next month it owes €452m to the IMF and €3.5bn to the ECB. In August, there are further payments of €176m to the IMF and €3.2bn to the ECB. In addition to all that, in the next two and a half months up to €8.2bn in outstanding Treasury bills, largely held by Greek banks, have to be settled or restructured.

Here’s a detailed graphic of what Greece owes to whom and when.

The most immediate concern is meeting the €1.5bn commitment to the IMF on June 30th. If it fails to make that payment, Greece will find itself in ‘technical default,’ and would risk losing the life supporting credit from the ECB which props up Greek banks. A full blown financial crisis could follow, leading to capital controls, the establishment of a parallel currency and steps towards Greece’s exit from the Eurozone.

2. What does Europe want from Greece?

• Pension spending (which accounts for 16% of Greek GDP) to be a cut by 1% of GDP, primarily by ending early retirement. This is the big sticking point (see question 4).
• Budget surplus targets of 1% of GDP this year, 2% in 2016 and 3.5% in 2018.
• A wider VAT base to include sales taxes of 23% on medicines or utility bills.

3. What can Greece offer Europe?

Last week, Zoe Konstantopoulou, the Greek Parliament’s speaker, outlined the preliminary findings of the ‘debt-truth committee:’

“Bailout funds provided in both programmes of 2010 and 2012 have been externally managed through complicated schemes, preventing any fiscal autonomy. The use of the bailout money is strictly dictated by the creditors, and so, it is revealing that less than 10% of these funds have been destined to the government’s current expenditure.

“The debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious.”

Today, the Wall Street Journal is reporting that Greece is now willing to move on pensions, cutting spending by 0.4% of GDP this year and 1% in 2016 by increasing contributions from employers, phasing out top-ups and raising the retirement age.

Two weeks ago, we discovered Greece’s leaked counter-proposals to restructure their outstanding debts. These included large write-offs, extended maturities, GDP-indexed debt and profit reimbursement. Most of these have been rejected by the Troika, but if these new reforms to pensions and VAT are substantial, the Eurogroup may give some ground on debt relief.

4. No final deal expected on Greece: What’s the mood music? – Open Europe 

“As Eurozone Finance Minister prepare to continue talks with the bloc’s problem child – Greece – in Luxembourg this afternoon, chances of striking a deal today look slim, as Greek Finance Minister Yanis Varoufakis admitted himself. With no breakthrough expected, the mood music around the talks is what we should watch. Will Greece and its lenders agree to resume technical discussions? Will there be any signs of convergence? Or will both sides just stick to their positions? Open Europe follows.”

5. Will Greece issue a new currency?

If the ECB, which last week raised its ceiling for liquidity support for Greek banks by €2.9bn to €85.9bn, chooses to stop supporting Greek banks, it is game over. Greek banks would collapse overnight; deposits worth €4.2bn were withdrawn last week.

If a deal isn’t reached today, discussions will begin around introducing capital controls, the expectation of which could precipitate a bank run, grinding the economy to a halt. Greece would have to look at establishing a parallel currency, at least in the short-term (which doesn’t necessarily mean that the country would have to leave the euro unless the new currency violated EU treaties). Writers at Bruegel consider how a new currency could be introduced which would act as de facto but (importantly) not de jure legal tender.

“Biagio Bossone and Marco Cattaneo write that the introduction of a Greek parallel currency could take place in at least two ways. The first avenue would be for Greece to issue IOUs, i.e., promises to pay to the bearer euros upon a future time expiration. Basically, these IOUs would be euro denominated debt obligations issued and used to replace euros to pay salaries, pensions, etc. The second avenue would be to issue Tax Credit Certificates (TCC) and assign them to workers and enterprises at no charge. TCC would entitle the bearer to a tax reduction of an equivalent amount maturing in, say, two years after issuance. Such entitlements could be liquidated in exchange for euros and used for spending purposes. Liquidation of TCC would take place against purchases of TCC by those who would provide euros in exchange for the right to the future tax cuts.”

6. Why the state of Greek hospitals tells us the Drachma is coming – Daily Telegraph

“The brunt of the austerity has been borne by the provision of medical services and supplies. Greece’s 140 state hospitals saw a 94% fall in their budget in the first four months of the year…” 

There is an international precedent for states and countries facing an acute cash crisis having to issue parallel currencies, but the fear is that in Greece’s case, this would not be a temporary issue:

“‘The trouble with IOUs is that you’re issuing a currency, and a Greek IOU won’t have the same value as a euro,’ says Mr Knight. “If they are used to pay wages or suppliers, then you soon get into trouble. When people go out and want to use the IOUs to buy bread, you end up with a de facto devaluation.”

7. Why Greece, and not Ireland, Portugal or Cyprus? –  Stavros Panageas at Europa o no

“Why are other European countries such as Ireland, Portugal, and Cyprus seemingly out of the woods, while Greece isn’t? Surely, Greece was in a worse situation going into the crisis; in particular it had a very high level of debt in 2008. But other European countries had high levels of debt (Belgium, Italy) and they did not suffer the fate of Greece.

“I believe that the key issue was not the high level of debt in isolation. It was the combination of a high level of debt with a grossly underestimated “fiscal multiplier” that sealed the fate of the stabilization program. The fiscal multiplier determines how much you kill growth as you are cutting the budget. In a sense, it is the ratio of the medication that is likely to kill you before it cures you.

“In Greece the fiscal multiplier proved to be above anyone’s expectation, by official admission of the IMF. In my view, the large fiscal multiplier is just a testament to the frictions in labour markets, good markets, and the bloated public sector – all issues that required structural reform that met with staunch opposition by special interests. In addition, it didn’t help that the stabilization program allowed the Greek government to reduce the budget deficit by increasing taxes (indiscriminately — even on poor people), rather than by reducing expenses.”

8. A Greek default would be a valuable lesson in basic economics, says George Will at The National Review

“It cannot be said too often: There cannot be too many socialist smashups. The best of these punish reckless creditors whose lending enables socialists to live, for a while, off other people’s money. The world, which owes much to ancient Athens’s legacy, including the idea of democracy, is indebted to today’s Athens for the reminder that reality does not respect a democracy’s delusions.”

9. EU Commission President, Jean-Claude Juncker, doesn’t want to think about Grexit – Der Spiegel 

SPIEGEL: Membership in the euro zone was long considered to be irreversible. Now, there is a distinct possibility that a country might leave the common currency area. What does that mean for Europe’s future?

Juncker: You are asking a theoretical question that I don’t want to consider. I want to prevent Greece’s exit. And we have come a long way. Think back to the year 2010, when the difficulties began. At the time, the danger was enormous that the contagion could spread to other countries. Had Greece left the euro then, it could very well have turned into a conflagration for the entire euro zone. Today, a Grexit would still have significant consequences, but the fear that it could cause the exit of additional member states has waned considerably. Nevertheless, the entire world would get the impression that the make-up of the euro zone can be changed. We have to avoid this impression.

Even if there is a deal today, it is not the end of the saga. Without significant debt relief, Greece will need tens of billions more to meet its future obligations. Today’s negotiations are about releasing a mere €7.2bn. While support for Alexis Tsipras’s Syriza party is still high, that could easily change if unpalatable concessions are made to the eurogroup. And even if the Greeks do cave in, the deal is only for the interim. We’ll be back in August for another installment of this interminably painful, wasteful and boring debt crisis.

Zac Tate is Deputy Editor of CapX