European leaders meet on Monday with enormous questions still hanging over the future of the euro in its current form. Leaders are expected to sign off on permanent crisis mechanisms for the eurozone and on new rules to enshrine budgetary responsibility into national legislation.
However, it is unlikely that Greece will be ready to put a deal with its private sector creditors in front of Europe's policymakers, as analysts worry that risks of a default are rising.
The Greek government has nearly €14.5bn in bonds maturing on March 20, the first true hard deadline of 2012. With no way of raising money through the capital markets, Greece has to find some way of rolling over that debt. Public money, in the form of a joint IMF-EU bailout, is the country's only real option.
If the "private sector involvement" (PSI) is accepted by Europe, it eases the path to a new bailout package, but does not guarantee it. The bailout agreed last year was contingent on a number of factors, of which the PSI was one. However, it also stipulated major reforms to the Greek economy and curbs to government spending. The reform agenda has slipped, and worse-than expected economic performance has made debt and deficit reduction in the short term a pipe dream.
What is at stake is more than just the Greek economy. The country is close, some analysts say, to a default and euro exit. While polls of the population say that they want to stay in the eurozone, the economic imperative to devalue the currency, combined with an escalation of the fear that has already seen many Greeks move their cash overseas, could see the decision made for them.
Should that happen, it could pull other countries down, cause confidence to collapse entirely and precipitate a global recession. The entire euro experiment could be fatally undermined.
In a note sent to clients on Monday morning, Exotix economist Gabriel Sterne summed up the gravity of the situation.
"In our opinion it is no exaggeration to say the next two months represent a critical period in the history of global economic policymaking," Sterne said. "The timeframe is not some artificial construct represented by the latest high profile meeting of policymakers, in which a fanfare of policy packages rallies the markets before unravelling. It is bounded by the immovable €14.4 bn [Greek government bonds] maturing on March 20.
"The issue is no longer whether Greece defaults before then. In our opinion default is almost certain. The big question is the manner of Greek default. That will determine not just the future of Greece, but, if things go badly, the whole future of the eurozone."
The euro had been trading at six-week highs against the dollar, but fell back on Monday morning as the summit approached.
While the markets expect a deal to be agreed with Greece, the bigger question is over its ability to implement reforms. German policymakers in particular have indicated that they are not prepared to bail out Athens indefinitely and unconditionally. A reported call from Germany to have the EU take control of the country's budget was roundly rejected by the Greek government, but, one way or another, Greece needs to find some way of restoring confidence in its ability to manage its economy - and fast.
As BNY Mellon strategist Simon Derrick said on Monday morning: "Although officials may continue to place as positive a spin as possible on the various negotiations taking place over the second Greek bailout , there is little evidence so far that they will reach conclusions that all parties are comfortable with. Given this it’s important to get to grips with the details of both the PSI negotiations as well as the latest German proposal for the EU to take control of Greece’s budget. The latter issue in particular looks as if it could prove the critical one.
"Put simply, the choice currently being presented to Greece by Germany is that it either accepts a loss of economic sovereignty or it begins to prepare for a disorderly default and the likelihood of an exit from the euro."