Greece's month of living dangerously: Who will blink first - Alexis Tsipras or Angela Merkel?

Athens’s quest to secure a new EU deal begins tomorrow. The stakes are high, but when does the money actually run out?

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The Independent Online

“After five years of bailout barbarity, our people cannot take any more.” Anybody hoping for a hint of compromise from Greece’s new leader, Alexis Tsipras, will have been left disappointed by the Syriza leader’s hard-line stance with the nation’s international creditors.

Mr Tsipras’s defiant parliamentary debut as prime minister – underlining a string of spending commitments such as raising the minimum wage in breach of Greece’s two €240bn (£178bn) bailouts –will have had Germany’s Chancellor Angela Merkel tearing her hair out in Berlin.

But Syriza’s refusal to accept the next €7.2bn payment due from the Troika of the European Union, European Central Bank and International Monetary Fund, sets Europe on course for a frantic 18 days of diplomacy before 28 February, when Greece formally leaves the programme and faces the impossible prospect of funding itself in international markets.

Greece’s firebrand government wants a new deal and a bridging loan to get there –  but so far the rest of the eurozone is refusing to budge and pressing Greece to honour its commitments. The lack of room for compromise leaves Europe playing the biggest game of “chicken” in decades, with the prospect of savage consequences for Greece and Europe’s still nascent economic recovery.

The renewed threat of “Grexit” has already prompted contingency planning meetings chaired by David Cameron. Greece could yet stumble out of the single currency by accident.

The first efforts at squaring a seemingly impossible circle begin tomorrow in Brussels, at an emergency meeting of the eurogroup – a gathering of the eurozone’s finance ministers. Greece’s finance minister Yanis Varoufakis is likely to again find himself in an 18-to-one minority over his calls for a new loan, as the chairman of the group, Holland’s Jeroen Dijsselbloem, has already said: “We don’t do bridging loans.” Mr Varoufakis intends to present a “comprehensive” proposal – likely to involve raising the amount of short-term debt the government can issue by €10bn to €25bn – but it’s likely to fall on deaf ears.

Tomorrow is also significant for Greece because the ECB will no longer accept Greek government debt as collateral in return for loans to Greece’s flailing banks. They will be forced to take more expensive emergency liquidity assistance (ELA) to stay afloat and the risks of the loans stay on the National Bank of Greece’s balance sheet.

Realistically the eurogroup meeting is likely to be a pathfinder for Thursday’s eurozone heads of state meeting, also in Brussels, at which the Greek premier will again feel the collective brunt of European leaders’ anger. The meetings are being played out against a backdrop of apocalyptic rhetoric from the Syriza leadership, attempting to talk up a weak hand by warning of the domino effect of Grexit.

Mr Varoufakis told Italian state television network RAI: “The euro is fragile, it’s like building a castle of cards; if you take out the Greek card the others will collapse.” Just for good measure, he added: “I would warn anyone who is considering strategically amputating Greece from Europe, because this is very dangerous. Who will be next after us?”

If these two meetings pass without a hint of a deal, attention then switches to the eurogroup’s previously scheduled meeting on 16 February. Mr Dijsselbloem has warned that this would be Greece’s last chance to apply for a bailout extension, because some eurozone countries would need to consult their parliaments to give the go-ahead. “Time will become very short if they don’t ask for an extension [by then],” he said.

Another hurdle for Greece comes on 18 February in Frankfurt, when the ECB’s governing council meets to approve an extension of the ELA assistance to its banks. Technically, a two-thirds majority could end the support, but in practice such a catastrophic decision would be taken by the politicians. Gilles Moec, a Bank of America Merrill Lynch analyst, said: “We expect the ECB to provide access to ELA liquidity for as long as there is room for compromise. The ECB, as an unelected body, is not there as a substitute for the Greek and European political authorities. They need a deal – or at least the open expectation of a deal – for cover.”

Time for a deal runs out on 28 February. Without an extension of the existing deal or a new programme, the ECB is likely to cut off funds for the Greek banks from the ELA. That leaves Greece’s central bank needing to find other means to support its banking system: the only realistic way of doing that is by pulling out of the euro and issuing its own currency. Without a compromise, or a surrender from Syriza before that, the risk is that Greeks would wake up within days to a system of emergency capital controls to stop cash fleeing out of the country to avoid a devalued “new drachma”.

Free movement of capital is a founding principle of the EU: the question then would be how long its leaders would be willing to tolerate “temporary” restrictions like those in place in Cyprus for nearly two years now. Meanwhile, the social consequences of this leap into the dark could be profound. As one analyst put it: “Savings wiped out, rampant inflation – maybe even tanks on the streets.” As the clock ticks down, Europe waits to see who blinks first: Mr Tsipras or Ms Merkel?

An unfolding tragedy? Greece’s diary

Wednesday 11 February

Emergency meeting of eurozone finance ministers, (known as the eurogroup). Greece also loses access to cheapest funding from the European Central Bank.

Thursday 12 February

European leaders meet in Brussels. Alexis Tsipras’s first meeting with all fellow European prime ministers.

Monday 16 February

Deadline to reapply for bailout according to eurogroup head, Jeroen Dijsselbloem.

Wednesday 18 February

European Central Bank governing council meeting to renew emergency funding.

Saturday 28 February

Greece due to receive final €7.2bn instalment from Troika. Without a deal by this date, Greece could lose access to ECB funding.