What is going to happen with Greece? Nobody knows. That does not mean nobody cares. On the contrary people care passionately, in directly conflicting directions. On both sides are participants determined not to concede. This impasse illustrates the folly of creating a currency union among sovereign states that lack common political institutions, powerful emotional bonds or strong economic similarities. The marriage is ghastly but divorce is scary.
Greece is now on the brink of default. It owes €1.5bn to the International Monetary Fund this month; another €452m to the IMF and €3.5bn to the European Central Bank next month; and a further €176m to the IMF and €3.2bn to the ECB in August. Without a deal with the rest of the eurozone to release €7.2bn in the remaining funds from its bailout agreement, Athens will be forced to default. It has no other source of money. Its access to markets is closed. (See chart.)
If a deal with the eurozone is not reached, Greece will default. The ECB would then reconsider the acceptability of claims on the government (be they direct liabilities or guarantees) as collateral for its lending to banks. Haircuts would certainly be raised sharply. The ECB would find it particularly hard to lend against collateral supplied by a government that has defaulted to itself. The knowledge that default is imminent has already accelerated a run on the Greek banks. Without a deal, therefore, banks will soon be forced to halt withdrawals.