Questions abound as Greek debt negotiations come to head

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The Greek government claimed that its new offer to the European Union, drafted after a furious weekend of cabinet meetings and diplomatic manoeuvring, would break the negotiating deadlock that has driven the country to the verge of default and exit from the euro zone.

On Sunday in an official statement, the office of Greek Prime Minister Alexis Tsipras said: "The prime minister presented the three leaders Greece's proposal for a mutually beneficial agreement that will give a definitive solution and not a postponement of addressing the problem."

The three leaders were German chancellor Angela Merkel, French president Francois Hollande and European Commission president Jean-Claude Juncker, all of whom spoke with Mr. Tsipras over the weekend. They had told Mr. Tsipras that his government must deliver a final proposal ahead of Monday's European Union leaders' summit, which will include all 19 euro zone finance ministers, in Brussels. If they accept Greece's latest proposal, they are prepared to extend Greece's bailout program, which was to end on June 30, by six months and release €7.2-billion ($10-billion Canadian) in loans from the current bailout that the country desperately needs to stay afloat.

They made it clear to Mr. Tsipras that the summit would not be a forum for negotiations and that time was running out. Their patience has run thin after four months of go-nowhere negotiations that are aimed at delivering the €7.2-billion in loans to nearly insolvent Greece in exchange for fresh austerity and economic-reform commitments.

But there were no assurances on Sunday that the Greek proposal, whose details were not immediately known, would take the edge off the crisis and set the groundwork for a new, long-term bailout package. Greece has said that, minus a resolution, it would be incapable of repaying the €1.6-billion it owes the International Monetary Fund at the end of the month.

There was little sense on Sunday that Greece had finally caved in to the demands of the IMF, the EU and the European Central Bank after months of insisting its recession-battered economy could bear more austerity.

Indeed, the idea that Greece's euro zone membership might no longer be politically or economically sustainable is making the rounds in Europe's capitals. One of Ms. Merkel's Bavarian allies, Hans Michelbach, of the Christian Social Union party, said he wasn't getting his hopes up for an agreement on Monday. "Either Greece declares itself willing for a viable solution or the country must leave the euro," he said in a statement. "The euro zone could cope with the consequences of a Greek exit."

As the brinkmanship on both sides escalates, there are more questions than answers about how the next few days will unfold, and a sense that the euro zone is on the edge of an existential crisis even more severe than the one that gripped the region at the height of the post-Lehman Brothers recession.

Here are some of the questions being asked by investors, economists, politicians, bankers and voters.

How can the two sides be so far apart after so many months of negotiations?

They are actually pretty close on some key issues, including the size of the primary surplus – the budget surplus once debt payments are stripped out – that the Greek government must report. The issues over hiking the value-added tax (VAT) and pension reform also look surmountable. But what Greece really wants in exchange for a serious reform commitment is debt forgiveness; the country's debt to gross domestic product, at more than 170 per cent, is the highest in the Western world and entirely unsustainable. But the IMF, the EU and the ECB are not in the debt write-off game and the two other bailed-out countries, Portugal and Ireland, would go berserk if Greece were offered a debt "haircut." They didn't get one and argue that Greece should tough it out, as they did.

What would trigger Greece's exit from the euro zone?

Defaulting on the €1.6-billion IMF loan payment, due June 30, might not do it even though IMF boss Christine Lagarde has stated Greece will be treated to "no grace period or possibility of delay" to the loan payment. What could send Greece hurtling out of the euro zone is a default on the €3.5-billion bond payment owed to the ECB on July 20. Were it to happen, the ECB could decide that enough is enough and end the emergency funding to Greece's banks, whose deposits have been rushing out the door as customers fear the worst. To protect the banks from collapse, which would kill what's left of the Greek economy in minutes, Greece would have to institute capital controls and perhaps reprint the drachma.

Would the ECB really pull the plug on Greece?

That's the big question. The ECB is an unelected body and there is no way its president, Mario Draghi, wants to be seen as the man who pushed Greece out of the euro zone, making a mockery of his claim that the euro is "irreversible." In a Friday note, ING Financial Markets said "the ECB is definitely not willing to pull the trigger without political backing." That of course means getting the thumbs-up or thumbs-down from Ms. Merkel.

What would be the effect on the markets and economies if Greece were to bolt?

Hard to say, since no country has left the euro zone, so there's no playbook. But there is no doubt the euro zone and the EU are better equipped to handle Greece's exodus now than they were at the height of the recession a few years ago. The ECB has firewalls in place. It has launched a €1.1-trillion quantitative easing program and has another program, called outright monetary transactions (OMT), that would allow it to buy the sovereign bonds in unlimited quantities of any country in danger of losing access to the debt markets. Still, the market outcome of Greece's exit could be severe. Greece itself would certainly go into the toilet and there's a good chance, though no certainty, that the euro zone would slip back into recession.

If Greece were to quit the euro zone, could it stay in the European Union?

There is no road map, legally or practically, to steer a country out of the euro zone while staying inside the EU. But you can bet the EU and the Americans would ensure that Greece would somehow stay put in the EU. Note that some big-name Americans, including treasury secretary Jack Lew, are pleading for a friendly solution to the Greece-EU negotiations. If Greece left the EU, it would no doubt recruit Russia as a sponsor. As if to prove that Greece has geopolitical options, Mr. Tsipras met with Russian President Vladimir Putin on Friday at the St. Petersburg International Economic Forum.