[LONDON] Greece still has an escape hatch from even greater economic ruin. The trick will be navigating a way to it given the political and financial obstacles ahead.
As the deadline on a payment to the International Monetary Fund passes today and its current bailout deal expires, European leaders are still holding out the opportunity for the nation to win back enough of their goodwill to secure fresh aid and continued membership of the euro.
To keep the money flowing, Greeks must first endorse the package of austerity measures so dramatically rejected by Prime Minister Alexis Tsipras at the weekend. Should the "yes" side defy him and prevail in a July 5 referendum he called after talks broke down, voters then might need to elect a government that can return to the negotiating table.
"If the Greek people votes in favor of the compromise with the country's creditors, the other Economic and Monetary Union members will not be able to ignore that democratic vote," said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. "They would resume negotiations with Greece."
European Central Bank Executive Board member Benoit Coeure said in an interview with Les Echos newspaper that Greece's departure from euro can no longer be excluded. He said, though, he still sees room for a political deal should voters ignore Mr Tsipras's call to vote against the offer by creditors.
Investors initially signalled confidence that whatever the outcome, the ECB could contain any fallout. While Greek bank bonds plunged on Monday as the country implemented capital controls, the euro headed for its best quarterly gain in four years against the dollar. On Tuesday, European stocks slipped, German bunds advanced, and the euro pared its gain.
Encouraging calm were statements from German Chancellor Angela Merkel and other European leaders that, while the referendum has closed the door on aid this week, it could still be reopened if Greeks back the terms tied to assistance.
Mr Tsipras said on Monday that an "immense" cost means Greece will never be cast from the euro zone, arguing that the referendum will bolster his negotiating position. The betting is still that a "yes" vote would lead him to call Greece's second election since January - and the fourth in less than four years.
That could mean his Coalition of the Radical Left, or Syriza, wins back power with a flea in its ear from the electorate that it needs to bend to a deal or more Europe- friendly politicians secure control.
"A new mandate would need to be sought, likely by early elections," said Huw Pill, chief economist at Goldman Sachs Group Inc in London. "In the meantime, the Greek economy would also be left in a state of 'suspended animation.'"
The first test is keeping Greece's financial system alive as long as Sunday. That task has fallen to the ECB, which has already granted Greece breathing space by capping rather than cutting almost 89 billion euros (US$100 billion) of emergency liquidity assistance for its banks.
"Behind the scenes, expect the ECB to do whatever it takes to keep Greece afloat for the time being," said David Owen, an economist at Jefferies International Ltd. in London.
While rejection of the bailout requirements would maybe lead the ECB to rethink providing Greek banks with loans they may default on, a signal Greece is willing to talk might mean President Mario Draghi doesn't yet close the spigot.
Mr Coeure at the ECB told Les Echos in the interview published late Monday that the central bank is ready to maintain support until further notice.
YEAR OF PEACE?
Signs of a rethink in Athens should also be enough for European governments to provide temporary financing for Greece as it elects a new parliament, according to Erik Nielsen, chief economist at UniCredit SpA in London. Once that occurs and the legislature passes reforms, the outstanding 15.7 billion euros of aid would be delivered along with some form of debt relief.
"A 'yes' vote to reforms and fiscal tightening in return for continued euro-zone membership is the most likely outcome," said Mr Nielsen. "The 'Greek issue' will hardly be over for good, but we'll have bought at least a year of peace."
Read more on the Greek crisis here