Default is the first step on return to drachma in Greece

Greece’s default on its debt to the IMF could prove to be the first step in it effectively leaving the euro, proving that the currency union is not set in stone.

Greece’s bailout expires today, with a payment to the IMF also due, but people are already looking ahead with dread to July 20, when the country is due to redeem €3.45bn worth of bonds that are currently held by the ECB.

“If they fail to make this, it would be suicide” because it would be a breach of EU treaties, said a European Commission source.

It would mean that if the ECB is still providing emergency liquidity assistance at that point, this would cease and almost certainly trigger a return to the drachma.

In the meantime, the pace of developments will depend on whether IMF chief Christine Lagarde decides to report the Greek failure to meet its repayment deadline immediately, or delay it for up to a month as she is entitled to do.

Ms Lagarde warned Greece last week that she would make the report “promptly”, but she may delay it until after Sunday’s referendum, when it should become apparent whether there is any chance of a return to the negotiating table and the prospect of an agreement.

Greek prime minister Alexis Tsipras called the referendum late on Friday. It poses a simple question: “Should the proposal which was submitted by the European Commission, the European Central Bank, and the International Monetary Fund at the Eurogroup of June 25, 2015, which consists of two parts that together constitute their comprehensive proposal be accepted?” The no box appears as the first option, above the yes box.

Jeroen Dijsselbloem, the president of the Eurogroup of finance ministers, officially shut the door on an extension of the current, second, bailout in a letter to Mr Tsipras yesterday. It had already been extended by four months.

This effectively cuts off the €7.5bn still to be distributed from the bailout while other funds, including the Securities Markets Programme, have also been withdrawn.

The IMF default means that its remaining €16bn contribution to Greece would not be paid either.

Non-payment of the ECB bonds — there is an additional €3.2bn due in August — and the default on the IMF would not result in a selective default rating, according to a note from Investec Economics. However, failure to meet a relatively small commercial Japanese ‘samurai’ bond of €86m, due on July 14, would.

The European Financial Stability Facility, a temporary crisis resolution mechanism, is entitled to call in its entire bailout sum in the event of a default, including if Greece does not make repayments in time to the IMF, but this is highly unlikely to happen given the consequences.

There appears to be a willingness to engage in new talks next Monday, when the referendum results will be known.

German chancellor Angela Merkel said yesterday that there could not be any further talks until then, while Mr Tsipras showed his eagerness to engage further via a letter to the incoming EU presidency, Luxembourg, and its prime minister, Xavier Bettel.

While Mr Tsipras and his Syriza party will be campaigning for a no vote in the referendum, he has said he will return to negotiations even if the result accepts the terms of the creditors.

He may find himself with a political problem domestically as many members of his cabinet are expected to resign. He will almost certainly have to start planning for replacements and possibly for a new coalition partner.

In that event, the best he could hope for would be exactly what was on the table before the aborted meeting of the eurozone finance ministers on Saturday, as well as a five-month extension over which the promised €15.5bn would be paid out on foot of certain measures being achieved.

A no vote is not expected to strengthen his hand with the creditors, who are facing their own domestic difficulties: Germany, the Netherlands, Estonia, and Finland would still have to get the agreement of their parliaments to release the funds under the European Financial Stability Facility again.

Additional reporting: Reuters