Q&A: Where to now for Greece and EU?

A number of possible outcomes to saga remain, even in wake of referendum result

So Greece has voted no. What happens next?

Like every step in this dramatic saga, there are still a number of possible outcomes. The No vote makes a Greek exit from the euro zone significantly more likely than if there had been a Yes, but still far from certain. A lot now hangs on whether the EU leaders will re-enter talks with the Syriza-led government, whether a deal could be struck and, crucially, on what basis the ECB will supply money to its banks.

Prime minister Alexis Tspiras has said he will head to Brussels with a new mandate to negotiate a third bail-out programme.

But will anyone want to meet him when he arrives ? Initial reaction from senior German politicians and business figures was negative.

After the tensions of the last six months, and the invective during the campaign, trust has been destroyed between the two sides and the basis for talks is unclear, given that the Greek people have rejected the original plan put forward by the creditors.


German chancellor Angela Merkel is travelling to Paris on Monday to discuss the issue with French president Francois Hollande. These emergency talks are a sign of the high stakes for the euro project, as well as the dramatic events in Greece itself.

But the Greek government says it believes a new deal can be finalised quickly?

It does and spokespeople again emphasised this yesterday as the results were announced. But few others seem to share that view.

The question now is first whether talks can get going and then what kind of deal Tsipras will look for and what the big EU countries – particularly Germany – could sign up to. Tsipras has held out, in particular, for relief on Greece's debts, now approaching 180 per cent of GDP. While lengthy extensions of Greece's loans have already been agreed, the IMF agrees that Greece needs more, to improve its debt outlook and start to rebuild confidence in the financial markets.

So far the creditor countries have baulked at debt relief, hinting it might be available, at best, down the road. Meanwhile they accuse Greece of not finishing its last reform programme and not being willing to sign up to further measures. Despite these difficulties, there will surely be some early contacts between the two sides in the days ahead. The question is whether they can get going. Even if they do, time is now tight, with the banks running out of cash and a key repayment to the ECB due in a few weeks time.

And if talks don’t restart, or it is clear quickly that they can’t make progress?

Then it could get messy. Greece needs cash principally to repay its creditors. The next key date is July 20th, when it owes €3.5 billion in a bond repayment to the ECB. The turmoil of the last few weeks means the government also needs cash to meet payments to run the country, though up to recently it was taking in enough in tax to meet these bills, before account was taken of debt repayments due.

But the more immediate issue is the Greek financial system and its need for support from the ECB. Last week the Greek banks closed and limits were put on ATM withdrawals because the ECB declined to provide more emergency funding – via the Bank of Greece – to the Greek banks.

Because so many depositors have taken out their cash, and the banks don’t have access to additional funds, they simply don’t have enough cash to operate normally. In turn this is knocking on to real hardship for the Greek people and huge disruption to businesses.

How will the ECB decide what happens next?

The ECB board is due to hold discussions on Monday on the emergency funding of the Greek banks, now just under €90 billion. It has a few options. It could provide new funding to allow the banks to reopen, as the Greek central bank is calling on it to do, but doing this could be problematic before some kind of new programme is finalised, or at least in negotiation.

The ECB could keep the current level of emergency funding, which would keep the banks closed and could gradually turn up the heat on the financial system. The banks are already reported to be chronically short of cash and the risk if they don’t get more cash is of bank closures and more disruption.

The ECB could also decide to take a harder line by restricting liquidity (technically by restricting rules on which banks supply collateral for funding). This would only exacerbate the financial pressure.

Finally, at some stage, the ECB could shut off the liquidity tap of emergency funding, possibly if Greece does not make its July 20th payment and no talks are underway by then on a new programme. This would collapse the banking system as it currently stands, forcing Greece to introduce a new currency to try to restart its economy and financial system. A key issue for the ECB in the days ahead is whether the Greek banks remain solvent, as it cannot fund insolvent institutions under its own rules.

Is there any way the Greek government can buy time?

There has been speculation they could start paying public servants and social benefits in some form of IOUs, rather than cash. These IOUs could be used to make future tax payments and in themselves become a medium of exchange, saving the exchequer some cash.

California did this for a couple of months in 2009 and Argentina did the same, with less success, during its 2001 default. If this process dragged on it could effectively be the start of the introduction of a new currency. However the logistics and practicalities of this are complicated and winning acceptance and trust for a new currency – or even for some kind of temporary IOU system – is difficult.

What does Greece need?

Most immediately it needs cash for its banking system. Some kind of political signal that a deal between Greece and its creditors could be reached is likely to be necessary for the ECB to provide more cash. This is the where the danger of a political stand-off is now most acute, particularly as the German-led hawkish ECB wing is already reportedly unhappy with the extent of cash extended to Greece.

Meanwhile we don't know the precise state of the Greek banks. Unless there is some political leadership from Europe to actually sort this out, it could just gradually fall apart over the next few weeks.

Beyond support for its banks , the Greek government needs cash in the short term, with the negotiations on a third bail-out programme then providing a huge challenge for both sides. A key thing to watch in the next 24 hours is whether Europe will now engage in these issues, or will let Greece slide towards the euro exit door. The irony is that Grexit would be more costly in cash terms than a new programme, even with debt relief, but politically the rest of Europe could still struggle to do the deal.

And the wider implications?

The markets will likely be volatile as they measure up the likelihood of a Greek euro exit. In the short term the ECB has the firepower to smooth any problems in sovereign bond markets or the euro banking system. But in the long term the political and economy implications of a country actually leaving the euro are summed in the challenge of persuading everybody that, some day, other countries will not follow.