The EU is to hold an emergency summit to determine if Greece's proposed plan of "credible reforms" to save itself from near financial ruin is feasible.
Greece is struggling to pay back loans to other eurozone countries, the European Central Bank and the International Monetary Fund. Those loans are part of two previous bailout packages worth €240 billion — roughly $266 billion US — dating back to as early as 2010.
The country failed to pay €1.6 billion to the IMF on June 30. It has another €3.5 billion ($3.9 billion US) to return to the European Central Bank on July 20.
If Greece fails to make the latter payment, "it will be close to a situation of declared default by then," says Tassos Anastassiadis, who holds the chair in modern Greek studies at McGill University in Montreal.
The country is tightly controlling what funds it has left, as the ECB froze emergency funding. To prevent a run on remaining assets, Greek banks closed on June 29 and have remained shuttered since. Customers are limited to ATM withdrawals of approximately $84 Cdn a day and require special permission to send money abroad.
Greece reportedly requested between €10 billion and €12 billion from the European Stability Mechanism bailout fund on Wednesday.
The country was told to create and submit a detailed economic reform plan by Thursday if it was to have any hope of securing continued help from the EU.
The EU previously proposed a plan to help Greece make its payments. But in a snap referendum on July 5, Greek voters rejected it and the austerity measures it contained with 61 per cent of voters casting No ballots.
Many voters appeared dismayed by the prospect of another round of forced austerity, after the first one plunged Greece into an extended recession.
Greece had already implemented salary freezes, heath-care and pension cuts, and tax hikes as part of its prior loan conditions. The country experienced wage drops, increased homelessness and unemployment, and political unrest as a result.
Prime Minister Alexis Tsipras says he's created a plan with "credible reforms" that "will not bring recessionary effects."
In recent weeks, his government has been talking about debt relief from some of its biggest creditors, which has not gone over well. And now EU members are gearing up to decide if they'll accept his proposal, although German Chancellor Angela Merkel has said debt relief is off the table.
There are only two possible outcomes on Sunday, says Carmen M. Reinhart, a professor of the international financial system at Harvard University in Cambridge, Mass.
"Either an agreement is reached, support from the ECB is continued, Greece — for the time being — stays in the eurozone, or there is no debt agreement reached, the ECB does not continue to support the Greek banking system and Greece is several steps closer to Grexit."
If a plan is accepted
Anastassiadis, for one, feels that the EU and Greece are likely to come to an agreement Sunday.
But that doesn't mean negotiations will cease. Instead, a "new phase of negotiations" will start, he says.
The new plan is likely to last three years, Anastassiadis says, and include refinancing of the Greek banks and state in exchange for some reforms. It will also likely propose more talks on renegotiating the terms of the country's existing debt.
Greeks are pushing to have at least some of this debt, which is nearly 180 per cent of its annual GDP, written off. Main lender Germany, along with other EU lenders, have to date been unwilling to entertain this request.
"If we do it for Greece, it will be obvious within the eurozone that we will have to do it for other countries as well," says Anastassiadis, starting with Spain, Ireland, Portugal and Italy, and eventually leading to Latvia, Bulgaria and Romania.
Anastassiadis predicts that if there is to be debt renegotiation, it will lead to a special eurozone summit that will allow for some kind of debt relief for multiple countries, including Greece, while giving the ECB more power to monitor countries' economies and intervene.
"It becomes a win-win situation for everybody."
If a plan is rejected
The EU may also reject Tsipras's plan. At that pont, the ECB is likely to stop financially supporting Greek banks, says Reinhart.
"Then Greece is really going down the path of a Grexit," she says.
Without ECB funds, a quasi-currency will emerge, Reinhart says. Likely, the government will start paying its employees in cheques or some form of IOU that would take the place of money in daily transactions.
ATM withdrawal limits would remain, she predicts. Already, many citizens and companies are hoarding cash instead of paying bills, and payment delinquency rates would likely only escalate should this scenario play out, she says.
"We have a situation in which confidence has been lost. The system — the economic system, the financial system — are heavily damaged," says Reinhart. If a deal isn't reached, it will be "a real, real challenge" to restore it.
It's "extremely improbable" that Greece would be able to remain in the eurozone, continuing to use the euro currency, without a successful Sunday deal.
It may be forced to convert its currency back to the drachma, which it used before it entered the eurozone.
No other EU member has ever been forced out of the union in this fashion, says Anastassiadis, and it could spark a chain reaction or instill more uncertainty in the global economy.
"We would be in unchartered waters."