June 27, 2015 / 3:42 PM / 4 years ago

Factbox - Possible scenarios for Greece after a default

BRUSSELS (Reuters) - Euro zone finance ministers are discussing how to handle the fallout from a Greek default next week after Athens broke off negotiations on a financing-for-reforms package and called a referendum on the creditors’ reform demands for July 5.

Greece has to pay 1.6 billion euros (1.1 billion pounds) to the International Monetary Fund next Tuesday but does not have the money and because it is cut off from markets it can only avoid defaulting if it fails to get new loans from the other euro zone governments.

Until Saturday the last-ditch option to cover the IMF payment for Athens was to strike a deal on reforms and make available 1.8 billion euros worth of profits made by the European Central Bank on purchases of Greek bonds during the debt crisis.

But because Greece ended talks on a deal last night and called a referendum, the money cannot be disbursed and Greece is on course to default on Tuesday.


The prospect of a default may trigger a bank run in Greece as soon as Monday, a prospect which could cause the government to introduce capital controls on Sunday.

If the outflow of deposits does not accelerate on Monday, it might happen once Greece formally defaults on Tuesday.

There were no signs of panic on Saturday morning but more people than normal were taking money out of ATM machines and one of the few banks open at the weekend had a queue of dozens of people waiting to get in and then it did not open.


Once Greece is formally in arrears with the IMF, euro zone governments will have to decide if they want to demand the full repayment of their loans, making use of what is called cross-default clauses allowing other lenders to demand to be paid back if Greece defaults on one of them.

Euro zone officials have previously indicated that they were unlikely to do that, so as not to make Greece’s financial situation even more difficult. The decision is ultimately a political one.


The European Central Bank will have to decide if it can continue supporting the Greek banking system with its emergency liquidity assistance (ELA) next week after the government defaults on the IMF payment.

ECB officials have been signalling that they would continue to support Greek banks as long as they have enough collateral. However, a default on the IMF and no prospect of financing from the euro zone through a financing-for-reforms deal may mean that the value of Greek collateral will fall dramatically, ending the ECB’s support line.


The European Central Bank may also choose to wait before withdrawing its support until July 20, when Greece has to redeem maturing Greek bonds worth 3.5 billion euros held by the ECB.

If Greece does not repay what it owes then, and it is unlikely to find the money without euro zone support, it would be hard for the ECB to continue providing Greek banks with more money.


Without the support of the ECB, the Greek banking sector will likely collapse and Greece will have to introduce a parallel currency in the form of some debt instrument like IOUs to cover the government’s domestic obligations.

This parallel currency to the euro could become the new Greek currency. It is unclear how long Greece could or would be willing to have two currencies, one of which — the IOUs — would very quickly undergo a major devaluation.


The Greeks are therefore likely to go and vote in the referendum on July 5 amid cash shortages, capital controls and possible social unrest. The Greek government has steered public opinion towards voting “no” to the creditors’ demands, which would effectively be a vote on leaving the euro.


If Greece votes in the referendum to agree to the creditors’ conditions for further financial help, the government would have to ask for and negotiate a third bailout programme with international lenders.

Such negotiations would probably take many weeks or even months because they would be even more difficult than those that broke down this weekend, officials said.

Additional reprting by James Mackenzie in Athens; Reporting By Jan Strupczewski; Editing by Philip Blenkinsop and Greg Mahlich

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