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Greece's Fate: High Noon in Brussels



The emergency Euro Summit in Brussels planned for June 22 to discuss the situation in Greece will decide whether Greece will continue in its current reform program imposed by its creditors or enter into a default against them. What will not be decided is whether Greece remains a member of the euro area. Despite all the talk recently about a Grexit, such an eventuality is not in the cards, no matter what the outcome is on Monday.

With this session, Prime Minister Alexis Tsipras of Greece has the last minute decision at the political level among his fellow leaders that he has sought. But in the process, he has achieved a Pyrrhic victory and weakened his own position more than was necessary. With deposits fleeing the Greek banking system as a result of his brinkmanship, and the European Central Bank Governing Council ready to scale back its emergency lending authority (ELA) for Greek banks, Tsipras faces the choice on Monday between taking the deal offered by the creditors—or not having the Greek banks open properly on Tuesday morning.

A leaders summit is never a forum for discussion of technical details of a rescue arrangement. Whatever happens on Monday evening, more meetings will be required before any cash can be distributed to Greece. The tight default deadline of June 30 suggests a possible extension of the euro area lending program with Greece, although the International Monetary Fund (IMF) may choose not to join.

The schedule for Monday calls for deputy finance ministry officials to meet at 9 a.m., followed by the Eurogroup of finance ministers at 3 p.m. and the leaders' Summit at 7 p.m. This means that the finance ministers will be tasked with doing in four hours what they have failed to do in the last four months. Given the correct decision of creditors to dismiss the latest Greek ideas presented earlier by Finance Minister Yanis Varoufakis, the finance ministers are not likely to reach any new technical agreement before the leaders meet. In practice, Tsipras is likely to be presented with the creditors long-standing demands. These he will be asked to accept or face the consequences. This ultimatum is not going to be a good political deal for his Syriza governing coalition.

Only Tsipras knows what he will choose. It is a close call, but given his recent rhetoric against the very deal he will be presented with, further economic crisis (e.g. default, deposit controls, and possible IOU payments to Syriza supporters) in Greece will be required to generate the necessary political will for a deal in Athens. Assuming though that Tsipras wishes to remain prime minister and avoid a collapse of the Greek banking system, the best one can hope for is that he answers with a "Yes, but…," and agrees to a terrible set of circumstances for the greater good of the Greek nation. He would then need a new mandate from the Greek people to finally approve the deal, possibly in the form of a voter referendum, which under the circumstances would seem certain to pass with a wide majority.

But even in such a benign scenario, there will be no clean continuation of the current program on June 30. The IMF will not be paid on time, and at least a couple weeks of acute political uncertainty lie ahead. Deposit controls to prevent bank runs may be necessary.

For all their blustering and chest-thumping defiance, Tsipras and Syriza have ensured that no good options are left from themselves, Greece, or the euro area.

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