Grexit: Here's what Europe is struggling to avoid

Greece's problem is EU's problem: Tsipras
Greece's problem is EU's problem: Tsipras   

Euro zone finance ministers and leaders are meeting in Brussels Monday to discuss the eleventh-hour reform-for-rescue proposals from the Greek government.

With the talks going to wire, and Greece still scheduled to make a payment to the International Monetary Fund that it currently can afford, Athens and its creditors are fighting to avoid pushing the country out of the euro zone - a "Grexit".

While there seems to be plenty of will from within Greece and the International Monetary Fund, European Central Bank (ECB) and European Commission -- the so-called troika -- to keep it in the euro zone, there is still some growing concern that all this may come to nothing.

CNBC takes a look at how a Grexit may happen.

What’s the big issue?

Greece has been trying to renegotiate its bailout since its new leftwing government, led by Alexis Tsipras, came to power in January. A succession of make-or-break meetings called to secure desperately needed funds for Greece have come to nothing.

If no deal is struck at the latest emergency meeting euro zone leaders Monday, the next "last chance" looks like the European Union summit on next Thursday to Friday. The European markets appear to have deadline fatigue at this stage and are barely reacting to a prospect which would once have sent them into tailspin.


The deadlock in the reforms-for-rescue talks center on the Greek government's refusal to compromise over pension cuts and other measures which will hurt many of its people, while its international creditors appear unwilling to bend on austerity.

Alexis Tsipras, prime minister of Greece, elected mere months ago on a wave of anti-austerity sentiment, told the St Petersburg Economic Forum in Russia Friday: "The European Union, which we are part of, should find its way back to its statutory principles: solidarity, democracy, social justice.

"By sticking to policies of austerity, and policies which harm social cohesion, which aggravate the recession, this is impossible."


Milos Bicanski | Getty Images

How could it happen?

If a deal on more funding in return for further fiscal reforms is not made, Greece may be forced into an outright default on its debt repayments. Its next big chunk of debt repayment is 1.5 billion euros to the IMF on 30 June, which IMF chief Christine Lagarde has already warned it will not waive or give extra time to repay.

This could then lead to the ECB turning off the emergency liquidity assistance tap which is currently keeping the Greek banking system – and essentially the government - afloat. A further payment, to the ECB, is due on July 20. It is then up to either the ECB or IMF to formally declare a default.

This would be what is called a "forced default" which could push Greece out of the euro zone. Greece might be able to continue using the euro, but may prefer to return to the drachma and live with a devalued currency.


If it becomes "just another relatively poor unilaterally euroized non-EU Balkan economy" (like Montenegro), as Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics, posited in a blog this week, with the euro but without ECB access, it would lose any benefits of a cheaper currency.

Further economic turbulence, in a country which has already lost around a quarter of its gross domestic product since 2009, is likely to result.


Could the euro zone survive?

The increased powers of the ECB since the crisis may mean that a Grexit would be less disastrous for the euro zone than in 2012, when Greece along with the debts of Spain and Italy shook the markets.

Last week's ruling on the existing its bond-buying program for stricken countries (known as the Outright Monetary Transaction) means that the ECB been given "broad discretion" to decide whether it's acting within its own mandate.

This could include "a more targeted intervention," Greg Fuzesi, euro area economist at JPMorgan, wrote in a research note. He suggested an Anti-Contagion Purchase Programme allowing the ECB to intervene in bond markets "where it felt that contagion had pushed yields too far".


Yet the answer is, no-one really knows. There is no template for a country to leave the euro.

"Should they press their demands, forcing Greece to exit, the world will never again trust the euro's longevity," Jeffrey D Sachs, director of the Earth Institute at Columbia University and one of the most internationally renowned economists researching poverty, warned in a blog this week.

- By CNBC's Catherine Boyle