Share Facebook

Twitter

Whatsapp

Mail

Whatsapp Greek Prime Minister Alexis Tsipras during a joint press conference following a meeting with the Austrian Chancellor at the Maximou hall in Athens on June 17, 2015.

The Greek debt crisis is reaching its endgame, with eurozone leaders due to hold an emergency summit in Brussels overnight in a bid to prevent the country crashing out of the euro. Greek Prime Minister Alexis Tsipras has a new offer of reforms to creditors to try and break the deadlock. Sheryle Bagwell explains what the last ditch talks mean for Greece and Europe.

Talk of a deal is in the air just as Athens faces a potentially more dangerous problem—a wholesale collapse of Greece's banking system. What’s happening?

Greek banks are fast running out of money. Indeed, there is a possibility that Greek banks may not open on Monday morning European time because of the looming liquidity crisis.

Reuters is reporting that the European Central Bank will hold an emergency meeting to discuss the banks positions before they are due to open.

Greek depositors and businesses last week drained the Greek banking system of more than four billion euros after talks broke down on a cash-for-reforms deal for Greece.

If Greece does default and is forced to exit the euro—then it would have to set up a new central bank with a new currency, probably worth a half of what the euro is worth now.

So that's why Greeks are taking their money out of Greek banks and either transferring it out of Greece or putting it under their bed as euros.

The more people take out, of course, the more precarious the situation becomes for the banks. You can't call it a bank run yet because the Greek banks still have enough collateral to cover the withdrawals.

What stance is the European Central Bank taking?

Greece has turned to the European Central Bank for emergency loans to cover the withdrawals.

The ECB reportedly extended a further 1.75 billion euros—or $2.5 billion Australian—on Friday, but that was less than what the Greeks had asked for.

The ECB is starting to get worried about the solvency of Greek banks as the quality of the collateral the Greek banks are putting up—like Greek government bonds —comes into question as the country edges ever closer to default.

If the ECB were to decide to cut off funding to Greek banks— which it might do this week if no bailout deal is done— then the Greek government would have no other choice but to impose capital controls to prevent the banks running out of money altogether.

What happens if Greece is forced to impose capital controls?

We would probably see Greek banks close temporarily while they put in place strict controls designed to limit the amount of cash people take out per day, and how much they could transfer overseas.

We saw that happen in Cyprus during its banking crisis in 2013, in Iceland after its banking system collapsed as a result of the GFC in 2008, and in Argentina in 2001.

Capital controls are extremely unpopular with depositors to say the least. They also go against the whole principle of a common currency which is meant to sanctify the free movement of capital across the zone.

The capital controls did succeed in keeping Cyprus in the eurozone in 2013 by preventing a banking collapse. However, they were also part of a wider rescue package agreed with creditors to keep the banks solvent and to restart the Cypriot economy.

No such deal exists as yet for Greece—which makes the situation much more precarious.

Once capital controls are introduced, they can take a long time before they are removed. Iceland is only now laying out plans to withdraw its measures, seven years after its banking crisis.

What’s the chance of an agreement being reached at this high level summit?

No government wants to impose capital controls if they want to be re-elected again. That would appear to have focused the minds of the left-wing Syriza government, with reports that Prime Minister Alexis Tsipras has submitted a new set of proposals to the country's creditors ahead of tonight's leaders meeting.

It's not clear how far the proposals might go to meeting creditors demands. Greece's troika of lenders—the ECB, the European Commission and the IMF—are insisting on a credible reform plan that includes cuts to public sector pensions and tax increases on electricity before it agrees to any more bailout funds.

Greece to date has resisted further austerity measures and instead insisted on some form of debt relief; in other words, that its debts to the troika be written off, or delayed indefinitely.

That’s a no-go area for the German government, which would lose billions and probably suffer a backlash from its voters who have run out of patience with Greece. Indeed, there would appear to be a hardening of resolve in Germany to just let Greece default and leave the euro.

European shares have lost 10 per cent of their value as this crisis has dragged on, but we haven't seen the sort of turmoil in European bond markets that marked the last Greek crisis in 2012.

The feeling is the eurozone can withstand the fallout of a Greek exit, given it represents less than 3 per cent of the zone's GDP.

Will Europe and the conservative Germans really risk a Greek exit?

I don’t think so as this is uncharted territory for Europe, and the global economy. If the Greek government is offering some form of economic reform, I think Europe will grab it and possibly even offer in return some form of debt restructuring.

A final deal probably won't be nailed down tonight, but might follow in the coming days. Certainly European investors were more upbeat that a last-minute deal would be struck. Most European share markets, aside from Germany's, rose on Friday, while the yield on Greek bonds fell.

RN Breakfast is the show informed Australians wake up to. Start each day with comprehensive coverage and analysis of national and international events, and hear interviews with the people who matter today—along with those who’ll be making news tomorrow.