After the ‘no’ vote: what can the EU do about Greece now?

Euro-area leaders and finance ministers meet Tuesday in Brussels to discuss how Greece can stay in the common currency. It’s the first round of serious talks since Greek voters resoundingly rejected the terms of a prior bailout offer that expired on June 30.

What do the Greeks want?

Prime Minister Alexis Tsipras said his government wants debt restructuring as part of its next aid package.

In the short term, Tsipras and his new finance minister Euclid Tsakalotos will probably arrive in Brussels with many of the same proposals they had before the referendum. Their main goal will be to start talks on bridge financing, to help Greece get past its upcoming financing hurdles.

Tsipras also asked for a two-year loan from the European Stability Mechanism, the euro-area’s firewall fund, in a June 30 letter before the referendum.

When’s the real deadline?

July 20, most likely. That’s when Greece needs to pay about 3.5 billion euros ($3.9 billion) in bond redemptions for securities held by the European Central Bank. Greece needs short-term cash before then, or else an expanded lifeline from the ECB to its financial system.

That said, Greek banks have already been shut for more than a week because of their cash crunch. The ECB has mostly left intact its lifelines to Greek banks but on Monday it tightened conditions on emergency liquidity assistance. And on Tuesday it warned that offering too much flexibility to struggling lenders could weaken the incentive for others to follow the rules. That could be a reason to withdraw or reduce the support to Greece.

How much reril are the banks in?

A lot. Worst case scenario, they could all fail, taking household, corporate and public sector deposits with them. But that scenario is a long way off.

The ECB’s Governing Council has declared it will work closely with the Bank of Greece to maintain financial stability. Also, the ECB’s aid isn’t likely to be withdrawn abruptly.

What happens today?

Finance ministers meet first, starting at 1 p.m. Brussels time. They’re likely to rule out bridge financing, saying Tsipras must start from scratch on a third bailout because all previous offers have expired. They will, however, most likely start the procedures that allow the European Commission and other institutions to draw up bailout outlines.

Euro-area leaders meet at 6:30 p.m. They can declare that Greek bridge financing would be best for the euro area and ask finance ministers to take another crack at it. Or they can hold the line, telling Greece a third program is its only path. There’s an outside chance that talks break down, tipping Greece closer to the exit.

What about debt relief?

Talks on debt relief are likely to be political rather than practical. Greece’s biggest short-term bills are to the IMF, the ECB and its workers, which can’t be restructured easily.

In the longer term, the euro area could ease Greece’s overall debt burden considerably by lengthening the terms and lowering interest rates on some existing rescue loans. This has been on the table since 2012, but the Greeks haven’t persuaded the euro area to make good on the offer so far.

Who should we watch?

German Chancellor Angela Merkel has insisted that Greece can’t get any money for free and must meet euro-area rules to win assistance. French President Francois Hollande has led the side of conciliation, urging everyone to stay at the bargaining table.

Convincing the German leader will be a tough sell.

“The conditions for entering negotiations on a concrete ESM program are not in place at this time,” Merkel said Monday after meeting Hollande in Paris. “It will be important tomorrow that the Greek prime minister tells us how this should move forward and explain to us what precise recommendations he has.”

What happens next?

As long as politicians keep talking, the ECB won’t want to cut off Greek bank aid — which is the main thing holding the country’s finances up.

Euro-area finance ministers are due to return to Brussels on July 13 for a scheduled meeting and leaders may make that the next deadline for Greece to show it’s finally ready to meet creditors’ long-standing demands on taxes, spending and labor- market reforms.

But what if the Greeks don’t budge?

EU leaders say the Greeks are in a weaker position after the prior program — and its related offers of extension, short- term cash and debt relief — expired. Tsipras disagrees.

If the Greeks hold firm, they could be heading for the exit.

Then what?

If negotiations are formally broken off, the ECB may feel obliged to veto further liquidity to the banking system, a move that would probably lead to a broad-based default.

If a political breakdown doesn’t cause the ECB to reach for the trigger, any non-payment of the money Greece owes to the ECB on July 20 almost certainly would.

The euro area could decide to help Greece to an orderly exit, through a phased withdrawal of liquidity or some other settlement mechanism. It could also put Greece’s euro membership on temporary suspension, a prospect raised over the weekend by German Finance Minister Wolfgang Schaeuble.

As part of its efforts to protect the currency bloc, the ECB has said it’s ready to protect other countries from contagion.

[Bloomberg]