Greece has 48 hours to strike a new bailout deal with its eurozone creditors or face a banking collapse, a humanitarian emergency, and the start of an exit from the single currency, European leaders decided on Tuesday evening.



Unless Athens presents convincing details entailing more austerity as the basis for its third bailout in five years, all 28 national EU leaders, not just those of the eurozone, are to gather in Brussels on Sunday in emergency session to discuss how to contain the fallout from Greece’s financial collapse.

“We have a Grexit scenario prepared in detail,” said Jean-Claude Juncker, president of the European commission.

The stark ultimatum emerged from a special eurozone summit in Brussels on Tuesday where the Greek prime minister, Alexis Tsipras, was pressed to explain to the other leaders how he wanted to proceed following his victory in a referendum on Sunday when his country voted no to eurozone austerity measures as the price of staying in the euro.

The Greek leadership exasperated EU leaders by failing to present new bailout proposals on Tuesday. It is to present a formal application on Wednesday for a new rescue package from the European Stability Mechanism (ESM), the eurozone’s permanent bailout fund. If Berlin, Paris, Brussels and other key creditor capitals can agree the terms and timings with Athens, Greece would be offered a stay of execution in the euro. Sunday’s summit would then be of the 19 eurozone leaders.

If not, the summit of all 28 leaders, including David Cameron and heads of government of other non-euro countries, would instead convene to deal with the consequences of a Greece cut loose from the eurozone financial system.

“That shows there’s only a few days to go to taking a decision,” said Chancellor Angela Merkel of Germany. “That shows how serious it is.”

“Our inability to find agreement may lead to the bankruptcy of Greece and the insolvency of its banking system … This is the most critical moment in our history,” said Donald Tusk, the president of the European council who chairs the summits. “The stark reality is that we have only five days left to find the ultimate agreement. The final deadline ends this week.”

In the markets of Athens, the crisis feels very real. Video by John Domokos and Phoebe Greenwood Guardian

Tuesday night’s decisions in Brussels portend several days of frantic, round-the-clock negotiations. Athens is expected to ask for a new bailout programme worth up to €60bn over two to four years as well as measures to reduce its ballooning debt.

The chances of securing a deal hinge on the levels of cuts, austerity, and fundamental reforms of economic and fiscal systems that the Greek government is prepared to endure after Tsipras stonewalled for five months and then called his snap referendum.

Merkel ruled out any flat writedowns of Greek debt, but there is likely to be scope for debt restructuring.

Eurozone officials said that if things went well, a new bailout could be ready by mid-August. In the meantime, with capital controls in place and Greek banks running out of money, Tsipras made clear his country would also need immediate “bridging” support to prevent a banking collapse that would force a return to the drachma. That would also come with tight strings attached and up-front action through the Greek parliament to persuade eurozone leaders that Tsipras was committed.

Greece’s new finance minister, Euclid Tsakalotos, prompted optimism of a breakthrough when he said there was “political will” in Brussels to keep the eurozone intact. But Merkel, Tusk and others were grim-faced and visibly angered by Tsipras’ referendum gambit.

The plebiscite victory might have strengthened Tsipras’ hand, said Merkel, but it narrowed the options for all the other leaders.

In the hope that Washington would put pressure on Europe to agree a deal, Tsipras spoke to Barack Obama ahead of the summit. The US president then spoke to Merkel, putting pressure on the German chancellor to keep Greece in the eurozone. The White House is keen to avoid a Greek exit, fearful that it would increase Russian influence in the eastern Mediterranean.

In the run-up to Tuesday evening’s summit called as a result of the Sunday referendum, eurozone leaders demanded that Tsipras present specific proposals. Tsakalotos instead turned up at a meeting of finance ministers with speaking points jotted in pencil from a Brussels hotel notepad. The Greeks then promised a more formal submission by Wednesday.

“[With] the Greek government it is every time ‘mañana’,” said Lithuania’s president, Dalia Grybauskaitė, one of the Greek government’s harshest critics. “It can always be ‘mañana’ every day.”

Financial markets reacted nervously to the lack of progress. Share prices fell, while the euro slid against the US dollar. Oil prices fell and investors sought havens such as German bonds. Even if Europe agreed to a new ESM bailout, the money would not be available to Greece until the middle of August at the earliest – far too late to stop it defaulting on a €3.5bn debt payment to the ECB due on July 20.

But sources in Brussels said that there was a fix available, provided leaders believed the departure of the former Greek finance minister Yanis Varoufakis had created some goodwill.

They said that when Greece’s second bailout expired last Tuesday, €3.3bn in ECB profits from its securities markets programme due to Greece also vanished.

Ministers from the Eurogroup could decide to release the profits from 2014, which amount to €1.85bn, and top them up with an additional €1.5bn currently held by eurozone governments in order to facilitate payments due to the European Central Bank in less than a fortnight.

A eurozone source said: “It’s not an easy solution, but probably the only solution.”

The advantage for Greece would be that the money could be released without the delays caused by getting agreement through the parliaments of euro zone members. The potential downside is that the cash would need to be authorised by the Eurogroup unanimously.

Thomas Piketty, author of the best-selling book Capital, said it was up to Merkel to remember the benefits Germany had received from debt relief and show leadership.

In a letter to the Guardian, Piketty and other leading economists said: “Together we urge Chancellor Merkel and the Troika to consider a course correction, to avoid further disaster and enable Greece to remain in the eurozone. Right now, the Greek government is being asked to put a gun to its head and pull the trigger. Sadly, the bullet will not only kill off Greece’s future in Europe. The collateral damage will kill the eurozone as a beacon of hope, democracy and prosperity, and could lead to far-reaching economic consequences across the world.

“In the 1950s Europe was founded on the forgiveness of past debts, notably -Germany’s, which generated a massive contribution to post-war economic growth and peace. Today we need to restructure and reduce Greek debt.”