June 29

The European Central Bank announced June 28 that, for the first time since the resurgence of the Greek crisis in January, it would not be raising emergency liquidity assistance for Greece's banking system. The announcement came in response to Athens' decision to hold a referendum on the bailout measures on July 5. The preceding days' uncertainty had led to a significant increase in withdrawals from Greek banks, and the ECB's decision made it inevitable that the banks would not be able to open. Sure enough, later that day, the Greek government announced that the banks would not open on June 29, and a later release revealed the full extent of the capital controls that have now been implemented until after the referendum.

These controls are relatively limited at this stage. To protect Greece's tourist industry, foreign visitors will still be able to use ATMs to access funds from banks in their home countries. Greek citizens cannot, however, withdraw more than 60 euros (roughly $67), though domestic transfers and payments are still allowed. These controls can be expected to become swiftly and increasingly unpopular.

Meanwhile, Athens and its international creditors have been working hard to spin the referendum in their favor. If asked whether they want more austerity reforms, Greek voters would probably say no. But, if asked whether they want to stay in the eurozone, the same Greeks would probably say yes. The government is trying to make the referendum about reforms, while the Europeans are making a "no" vote tantamount to "saying no to Europe." In this spin game, the creditors are likely to win. A message from Europe that a "no" vote would lead to a so-called Grexit should resonate more than an assurance from Athens otherwise, on the basis that it takes two to maintain a monetary union.

One reason Greece might have suggested the referendum was to gain concessions from creditors theoretically motivated by a desire to sway the vote in the "yes" direction. If this was the case, it is unlikely to be successful. The creditors have a keen eye on the precedents being set in the crisis; appearing to cave into "blackmail" could reinvigorate Podemos, the Spanish equivalent of Greece's ruling Coalition of the Radical Left party (known as Syriza), just months before a general election in Spain.

Any Greek hopes that the markets would collapse, applying additional pressure on the creditors to soften their position, have also been deflated by the negative (but by no means violent) reactions in the bond, stock and currency markets. The so-called firewalls erected predominantly by the ECB, the Outright Monetary Transactions instrument, and the quantitative easing program appear to have successfully contained Greece's effects on bond, stock and currency markets for the time being, though these barriers will be sorely tested again on July 6 in the event of a "no" vote. 

After a weekend of activity, it looks likely that only a war of words will persist throughout the coming week. The banking system is on ice, the referendum bill has passed the Greek parliament, and the creditors are unlikely to change their position. Of course, the Greek government may decide that it has misjudged the situation and backtrack on its maneuverings. Still, the political capital Athens has already spent in this undertaking makes such a decision unlikely. Greece also will probably not make its 1.6 billion-euro bundled debt payment to the International Monetary Fund, which was due to be paid by June 30. For the next week, a fraught wait and a large number of opinion polls look to be the order of play.

June 24

Greece and its lenders spent June 24 exchanging proposals to reach an agreement before Athens' second bailout program ends June 30. Greece promised to introduce 8 billion euros (around $8.9 billion) in spending cuts and tax hikes for the next 18 months, but its creditors (especially the International Monetary Fund) expressed concerns about the plan focusing too heavily on higher taxes instead of spending cuts and economic reforms.

More important, members of the ruling Coalition of the Radical Left party, known as Syriza, and its minor coalition partner, the Independent Greeks, have suggested they could vote against the deal. The two parties have a parliamentary majority by just 11 seats, so it would not take many dissenting votes among the coalition's ranks to kill an agreement with Greece's creditors. Thus, even if Greece and its lenders reach an agreement in the next few days, the key challenge for the Greek government will be to ratify it at home. Considering Greece's complex political situation, several scenarios could unfold.

Scenario 1: A Deal is Reached and Ratified

The first scenario involves Greece and its lenders reaching a deal and the Greek parliament ratifying it by June 30. For this to happen, Greek Prime Minister Alexis Tsipras would need to appease dissenters within his coalition government and experience only a few defections.

If this happens, other eurozone countries could easily call for emergency meetings of their parliaments to ratify the deal. The key countries to watch include Germany and Finland, where many parliamentarians are skeptical of providing further assistance to the Greek government. The creditors would then start releasing some (but not all) of the assistance funds within a few days. This should allow Greece to handle its significant debt payments to the IMF (due June 30, though this deadline could be postponed) and to the European Central Bank in July and August, avoiding a default for a few months.

However, this scenario would still present problems. First, Greece's creditors would link the disbursement of money to economic reforms. As a result, Athens and its lenders would continue to negotiate intensively, and the creditors could once again threaten not to release the money unless the Greek government honors its promises. Second, friction between Athens and its lenders would escalate again later in the year anyway, when they resume negotiations over debt relief and a potential third bailout package.

Scenario 2: A Deal is Reached, but Not Ratified By the Deadline

In the second scenario, Greece and its lenders reach a deal, but Athens fails to ratify it by June 30. This scenario could occur either because of friction within the Greek government or because Tsipras takes extra time to appease dissenters.

This scenario would likely not be particularly traumatic, because the IMF could decide, since Athens and its creditors have reached a deal, to give Greece a few extra days to make its June 30 debt repayment. According to IMF rules, countries can delay the repayment for roughly a month before the institution proclaims a default. The European Central Bank could also raise the cap on the short-term debt Athens is allowed to issue.

The longer the ratification is delayed, the more nervous Greek savers could get, and thus capital controls would become more likely. However, the existence of a deal (even if it is not a fully ratified one) should help ease concern about Greece's banking sector. As with the previous scenario, the next challenge would be to negotiate a third bailout and additional debt relief.

Scenario 3:  The Greek Opposition Approves the Deal

In the third scenario, Greece and its lenders reach a deal, but the Greek government is forced to rely on the opposition to ratify it. Already, parties such as New Democracy, the Panhellenic Socialist Movement and The River have suggested they would support the deal. Thus, the agreement could be approved by the Greek parliament, even if there was a rebellion within Syriza. However, this scenario would trigger early elections or a referendum because Tsipras probably would not want to be held hostage to the opposition.

This is the most complex scenario, because though the Greek parliament would have approved the deal, there would not be a government to enforce it. If this happens, Greece could appoint a caretaker government that would be in charge of making the repayment to the IMF and the European Central Bank and overseeing early elections. Capital controls, or at least a bank holiday, would probably have to be introduced to protect Greece's banks during the turbulent electoral period.

In the case of early elections, Tsipras would probably campaign on a pro-agreement agenda, defending the deal he negotiated in Brussels. He would likely be re-elected with a more coherent majority. Syriza would probably lose its most radical members, and Tsipras would take charge of a more traditional center-left force.

Scenario 4: The Greek Parliament Rejects the Deal

The fourth scenario sees Greece and its lenders reaching a deal, with the majority of the Greek parliament voting against it. This would accelerate a default. However, this possibility is the least likely, because at least two-thirds of Syriza and most of the opposition would support the deal. The third scenario is more likely.

Scenario 5: The Deal is Not Submitted to Parliament

In the fifth scenario, Greece and its lenders reach a deal, but Tsipras decides not to put it to a vote in Parliament. This scenario includes at least two alternatives. First, Tsipras could decide to request approval from Syriza's Central Committee before taking the agreement to the Parliament. Should the party leadership reject the deal, the prime minister could decide to hold a referendum in search of a clear mandate from Greek voters. Second, the prime minister could have the Cabinet, rather than the Parliament, approve the agreement with Greece's creditors. When Greece requested a bailout extension in February, Tsipras decided not to put it to a vote and to have the Cabinet approve it instead. This was possible because the bailout extension did not involve any concrete measures that had to be approved by the Parliament.

Under this scenario, Athens could decide to approve a comprehensive package of "intentions" and then put every single reform to a vote, trying to convince the rebels on a case-by-case scenario. This option seems unlikely, because the Greek Parliament could feel betrayed and issue a motion of no confidence against Tsipras. This would put the opposition in an awkward situation, since they would have to decide whether to support Tsipras in the vote. This scenario is also unlikely because Greece's lenders would probably refuse to disburse money without a formal ratification from the Parliament.

Regardless of which scenario materializes, the Greek crisis is far from over. Some scenarios would be more traumatic than others, but all include continued negotiations between Greece and its lenders. The threat of a "Grexit" will not go away in the foreseeable future. Even if the Greek Parliament ratifies a deal quickly, Athens will continue to push for debt relief, and its creditors will continue to seek reforms in exchange for additional funds. The more traumatic scenarios involving a rebellion within the Greek government and elections or a referendum would only complicate the process, push Greece closer to introducing capital controls, and increase the likelihood of a disorderly default.

June 22

Eurozone finance ministers met June 22 to continue discussing Greece's future after Greek Prime Minister Alexis Tsipras presented an updated list of proposals for economic reform a day earlier. Greece and its creditors did not reach an agreement, but Eurogroup President Jeroen Dijsselbloem expressed optimism that the two sides would settle on a deal later in the week. Still, he stressed that Athens and its lenders are still debating what "prior actions" Greece must take before financial aid is disbursed.

Though the details of Greece's latest proposals have not been released, Greek media have suggested that they include reforms on taxes and, more important, pensions. According to various reports, the Greek government offered to gradually increase the national retirement age and abolish early retirement. The question is whether Greece's proposal for "progressive" reform will be good enough for the European Union and the International Monetary Fund, which have asked Athens to cut spending on pensions — a red line for the Greek government. It is unclear whether the proposal insisted on debt relief, one of the ruling Syriza party's core demands and a highly controversial issue in the European Union. Greece's creditors may promise to negotiate debt relief in the future, but they are unlikely to take concrete action in the current round of negotiations.

Dijsselbloem's reference to "prior actions" that must be taken before any money is unlocked confirms that Greece's creditors are worried not only about Athens' proposals but also about the government's ability to enforce them. The European Union is not alone in its concern: According to German media, the German Finance Ministry sent a report to the Bundestag, Germany's parliament, that said Athens should request an extension of its bailout program and agree to implement a list of measures before any funds are released.

Meanwhile, Greek banks remain in a fragile situation. The European Central Bank once again decided to raise emergency liquidity for Greek banks, and it will assess whether further increases are necessary in a follow-up meeting June 23. ECB President Mario Draghi has said the organization will continue to extend emergency liquidity to Greek banks as long as they remain solvent, but ECB action depends on the banks' ability to provide eligible collateral — an ability that is quickly eroding. Capital flight has accelerated over the past few days, bringing the Greek government ever closer to having to introduce capital controls (or at least a bank holiday to keep people from withdrawing their savings). Eurozone officials are optimistic about the progress of negotiations, but Greek savers are growing more restless each day.

June 19

The Greek crisis continued to escalate June 18, when Athens and its lenders failed to reach an agreement at a meeting of eurozone finance ministers. After the meeting, European Council President Donald Tusk announced that eurozone leaders would hold an emergency meeting June 22. The meeting creates an additional chance for negotiation before another European Council summit is held June 25. The move also confirms that the debate between Athens and its lenders has become purely political rather than financial, and prime ministers and presidents have replaced finance ministers and EU officials as the main negotiators.

Things were relatively calm in Greece on June 19; banks were operating normally after the failed Eurogroup summit. Still, Greek banks are under massive stress, and multiple reports suggest that capital flight has accelerated this week. During an emergency meeting June 19, the European Central Bank decided once again to provide Greece's banks with additional liquidity.

In the meantime, the Greek government continues to play the Russian card. On June 19, Greek and Russian officials signed an agreement to build the Greek section of the Moscow-sponsored Turkish Stream natural gas pipeline. According to Russia's energy minister, Alexander Novak, the two countries will have equal shares in the pipeline, which will start construction in 2016 and should be ready by 2019. Though Russian officials expressed interest in investment and trade with Greece, no bilateral loans were announced.

In recent weeks, Athens and its creditors came closer to agreement on issues such as deficit targets and tax reform. The Greek government also accepted cuts to defense spending, though the European Union and the European Central Bank are demanding deeper cuts. Athens, however, has held fast to its demands for debt relief and continues to refuse to introduce significant reforms to its pension sector.

The Greek government, led by the Coalition of the Radical Left party, or Syriza, is looking for a deal that will allow the country to remain in the eurozone — but one that is different to those reached by previous Greek administrations. At this point, it looks as if Greece will get little more than a temporary agreement to buy it and its partners a few extra months of continued negotiations. Greece will probably not receive any form of debt relief in the current round of talks.

Next week will be crucial for the future of Greece. Should Athens and its creditors fail to reach a deal by June 25, things could spin out of control for the Greek government, which would probably be forced to introduce capital controls to prevent a run on Greek banks. While failing to pay its maturity to the International Monetary Fund on June 30 would not immediately represent a default, it would accelerate panic in Greece and potentially in international markets. Under these circumstances, a political crisis would probably lead to early elections. Syriza is the most popular party in Greece, but the decision whether to campaign on the promise to resume negotiations with Greece's creditors could break the party.

June 12

Even amid worries that a Greek exit from the eurozone is becoming increasingly likely, Greece has bluntly refused help from the International Monetary Fund. On June 11, IMF negotiators returned to Washington from Athens with reports that their Greek counterparts had called the agency "not needed" and said that its contribution was "not constructive."

Meanwhile Bild, the well-connected German tabloid, said that German Chancellor Angela Merkel was not ruling out the possibility of Greece's exit — a change of tone on the part of the German leader, who until now has consistently trumpeted the message, "preserve the union at all costs," as a counterweight to the much more hardline views of German Finance Minister Wolfgang Schaeuble.

Reports have also emerged that the eurozone countries have been debating possible courses of action if Greece and the European Union should fail to reach an agreement. The German government has also been discussing capital controls for Greece. This violates what many consider to be the key rule of capital controls — that they should not be discussed publicly. Open discussion encourages market players to swiftly remove their funds before they get trapped, undermining the purpose of the controls.

All hope, then, may seem lost. Important players appear to have washed their hands of the talks, and previously conciliatory and influential parties have changed their stance. Therefore, the only thing left to do is prepare for the inevitable default, capital controls, a "Grexit" and the subsequent breakup of the eurozone, right?

Not quite. The Greek tragedy has now been ongoing for five years. By this stage, all the players know their roles very well, even more so on the creditor side, since the government led by Greece's Coalition of the Radical Left, or Syriza, was elected only in January. The media now weaves back and forth between optimism and cynicism. Negotiations look promising one week and hopeless the next as both sides use the news to send messages in turn to the public, to each other, to the markets, and even to members of their own parliaments. The threat of negative news moving markets and causing problems, which would be so powerful in other countries, is somewhat nullified in Greece's case by two aspects: First, most of the country's debt is held by the public sector creditors with which Athens is currently in negotiations. Second, the European Central Bank has thus far shown itself to be happy to support Greece's banks, even while rivers of cash flow out of them. Earlier this week, for example, the European Central Bank raised its emergency liquidity assistance limit by the largest amount so far.

This is not to say that the situation will never get serious. A hard deadline and a soft deadline loom this month. The hard deadline arrives June 30, when Greece's current bailout program ends and the month's IMF payments are due. And on June 18, the Eurogroup meeting will offer an opportunity to strike a deal. Unfortunately, in this play, few actors base their decisions on whether it is "a good time." Chances are high that an agreement will be struck at the last possible moment. In the meantime, however, the media will no doubt continue to swing wildly been hope and despair.

June 11

Greece's negotiations with its lenders are progressing slowly as the parties continue to have difficulty finding common ground. In the meantime, rumors out of Athens and Brussels suggest that a short-term agreement is in the making. The supposed deal would involve extending the current bailout so Greece would receive the final tranche of 7.2 billion euros ($8.1 billion) along with nearly 11 billion euros in extra funds that had been allocated to recapitalize Greek banks. An extension of the current bailout could bring Greece temporary relief without creating too much resistance from Germany.

Extending the current bailout program would allow Greece to pay the almost 7 billion euros in maturities it owes to the European Central Bank in July and August. After August, Greece's maturities drop substantially for almost a year, which will theoretically reduce the threat of a default. This would give Athens and its creditors the opportunity to negotiate under calmer conditions.

From the Greek perspective, paying the European Central Bank could help Athens qualify for the bank's quantitative easing program. When the central bank launched its program earlier in the year, it excluded Greece on the grounds that the Frankfurt-based institution owned too much Greek debt. Should Athens be included in the quantitative easing program, its bond yields would probably decrease, making it easier for Greece to return to bond markets at some point in the future.

An extension of Greece's bailout would also make sense for Germany. Chancellor Angela Merkel is facing increasing resistance from the German parliament against extending further financial help to Athens. A third bailout program could be too controversial for the Bundestag. Several members of Merkel's Christian Democratic Union party and its sister party, the Christian Social Union, have said they would oppose it. While Merkel enjoys a comfortable majority in parliament, she will likely want to avoid triggering a political crisis. An extension of the current bailout could be somewhat more acceptable to German parliamentarians, because it would not involve new money. Even this idea, however, is likely to irritate some factions within the German government.

In recent weeks Germany has changed its position regarding Greece. When negotiations first began, Berlin's official line was to dismiss the reports that a Greek exit from the eurozone would cause substantial financial harm to the regional bloc. Over time, Merkel started to emphasize the negative geopolitical consequences of a Greek exit. She then took on a more prominent role in the negotiations, which caused friction with Finance Minister Wolfgang Schaeuble when it reduced his role in negotiations. Even if Merkel leads a grand coalition — and her center-left partners at the Social Democratic Party probably will support the decision to continue financial assistance to Greece — Merkel cannot alienate Schaeuble, who carries significant weight within the center-right. This will force Merkel to seek a compromise that is acceptable both for Greece and the rebels within her party.

While a temporary deal is probably the best thing Greece and its lenders can hope for in the current environment, it would leave many questions unanswered. The main one is the status of Greece's outstanding debt. The left-wing Syriza party began negotiations in January by seeking a write-down of Greek debt. But the eurogroup would not even begin negotiating on those terms, so Athens changed strategy and proposed a "debt swap." This would mean that Greece would receive a loan from the European Union's permanent bailout fund, then use that money to repurchase debt currently held by the European Central Bank. Athens has included a version of this idea in its most recent request to the European Union, earlier in the week. But while a bailout extension may be easier for the Europeans to digest than a write-down, the political conditions are still not ripe for giving an economically unstable Greece even more financial assistance.

The second question is whether a bailout extension would actually solve anything. Greece could use the 18 billion euros that are rumored to be on the table, but that would not make the country's debt any more sustainable or Athens' fiscal gap any smaller. More important, even a theoretically more acceptable idea such as a program extension would come with strings attached. The European Union and the International Monetary Fund will no doubt ask for reforms in exchange for the money, and it is very unlikely that a Greek government that thinks it has already compromised enough, will cross its "red lines" in negotiations to enact the kinds of reforms Europe will demand.

As a result, any potential deal that Greece and its lenders reach at this point would not produce any lasting solutions, only add a new chapter to the ongoing saga.

June 5

On June 4, Athens announced that it would bundle together the 1.6 billion euros ($1.8 billion) in maturities it owes to the International Monetary Fund in June. As a result, Athens will not make the four payments it was scheduled to make this month but will instead lump these into a single payment June 30. Though this is allowed under International Monetary Fund rules, it has rarely been done. This means that Athens has delayed the possibility of a default for three more weeks. It also means, however, that Greece will have to make a large payment by the end of the month.

The Greek government's strategy is meant to buy time. This week, Athens and its creditors each presented their own proposals for an agreement. Both sides have compromised on issues such as primary surplus targets and value-added tax rates, but they continue to disagree on labor market and pension reform. More important, Athens is once again pushing for debt relief — a core element of the electoral campaign for the ruling Coalition of the Radical Left party, known as Syriza, but a non-starter for the European Union. Greece's decision to delay the payment of International Monetary Fund debt means that Athens and its creditors could continue negotiating until the end of the month, when Greece's second bailout program formally ends.

But Athens is also buying time at home. Stratfor has long said that even if the Greek government reached an agreement with its lenders, it would have a hard time selling it to the Greek parliament. In recent hours, several Syriza members criticized the proposals made by the European Union and the International Monetary Fund, accusing Greece's creditors of ignoring Greece's economic crisis. Syriza and its junior coalition partner, the Independent Greeks, control 162 of the 300 seats in parliament. This means the government could not easily manage an internal rebellion. While estimations vary, roughly one-third of the party's lawmakers are believed to be "rebel" lawmakers.

In recent days, many opposition parties have said they would support an agreement between Greece and its lenders. This could create a chaotic situation in which the Greek government approves the deal with support from the opposition but without support from its own lawmakers. In that case, Greek Prime Minister Alexis Tsipras would likely call early elections to avoid becoming a political hostage to the opposition.

While Greece and its lenders negotiate, German media reported that German Chancellor Angela Merkel is willing to support an extension of the current bailout program, which would involve releasing around 11 billion euros in funds that were allocated to recapitalize Greek banks. While this option could be easier for the Bundestag to approve, it would support Greece only through the summer (Greece faces some 7 billion euros in debt maturities to the European Central Bank in July and August). Regardless of the veracity of this rumor, Merkel is limited in how flexible she can be with Greece because of domestic political factors.

In recent days, Merkel pushed for a political solution to the crisis, aware of the geopolitical repercussions of a Greek exit from the eurozone. This is a change of direction for Germany that makes an agreement more likely, but now Merkel, like Tsipras, has to formulate a deal that is acceptable for her own government.

Knowing that the negotiations have entered a mostly political stage, Tsipras once again decided to play the Russian card. On June 5, he held a short telephone conversation with President Vladimir Putin to discuss Greece's potential participation in the Moscow-sponsored Turkish Stream Pipeline. Tsipras understands that the European Union and the United States favor the Azerbaijan-sponsored Southern Corridor projects and is playing the Russian card to show that his government still has options.

June 2

Negotiations over Greece's future have entered a purely political phase as officials in Berlin and Athens hold a series of emergency meetings to reach a mutually acceptable deal to prevent a Greek exit. On June 1, German Chancellor Angela Merkel received French President Francois Hollande, EU Commission President Jean-Claude Juncker, European Central Bank President Mario Draghi and International Monetary Fund Director Christine Lagarde for an emergency meeting to discuss the situation in Greece. At the same time, Greece's Prime Minister Alexis Tsipras held a Cabinet meeting in Athens to draft a new proposal.

European Commission spokeswoman Annika Breidthardt said June 2 that "many papers" are being exchanged between Athens and its creditors. The details of the negotiations are unclear, but EU Commissioner Pierre Moscovici said June 2 that Athens had agreed to discuss pension sector reforms, one of the most controversial issues in the talks. Also on June 2, Tsipras announced that his government sent its own proposal to its lenders. Greek media reported that Athens' proposals are focused on issues such as value-added tax reforms and measures to improve government revenue, with no apparent mention of the pension system.

Greece and its lenders will likely reach a temporary deal — meaning that in the coming days or weeks Greece will probably receive funds in exchange for the introduction of mutually acceptable reforms. A Grexit will be avoided in the immediate term, but pressure on Athens to introduce reforms will continue, which means that the Greek crisis is far from over and the continuity of the Greek government remains in doubt.

This imminent agreement raises two questions. First is the IMF's long-term involvement in Greece. In recent weeks, the IMF expressed frustration at Greece's apparent lack of interest in substantial reforms. The IMF's participation in the negotiation is important for several reasons. From a financial point of view, having the IMF abandon the negotiation means its portion of the bailout money would not be delivered. From a political point of view, the German government is interested in keeping the IMF on board because it would make it easier for the German parliament to accept an agreement with Greece.

The second question is the legal nature of the agreement between Greece and its lenders. Greece's current bailout expires June 30. Athens will not be allowed to receive any money from the existing program after that date. In other words, if Athens only receives a portion of the final tranche of the program (7.2 billion euros) in the coming days, the rest of the money will not be available after June 30.

Considering Greece's significant debt repayments in July and August — some 7 billion euros in total — Athens needs money well beyond the end of its bailout program. Any new funds have to be ratified by eurozone governments, which will be controversial in countries such as Germany and Finland. More important, new financial aid for Greece will be linked to additional reforms, which will prove explosive for Syriza. As a result, early Greek elections are still a possibility, even if an agreement between Athens and its lenders occurs.