FORTUNE Live Blog: Greece on the edge as ECB opens Pandora’s Box by Geoffrey Smith @FortuneMagazine 4:41 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons 0955 ET: Let me count the ways: the Brussels’ press corps’ answer to Gandalf the Gray (WSJ bureau chief Stephen Fidler) helpfully points out that there are more solutions on offer to Greece than a binary in-out-shake-it-all-about hokey-pokey. Between capitulation to the creditors at one extreme and the introduction of a new drachma at the other, Fidler sets out three alternatives: 1. Greece leaves the eurozone but keeps the euro, in the way that micro-states like Montenegro and Andorra do. The main problem with this is that there is no lender of last resort, which is a big problem when the lender of last resort (the central bank) has been the lender of first resort for as long as most of us crisis-addled hacks can remember. 2. Greece introduces a Currency Board, creating a new currency but locking it to the euro. But that again gives us the LOLR problem because the Greek central bank couldn’t create money freely. The final alternative is also the most intriguing: Greece introduces a new currency in parallel with the euro, effectively IOUs backed by the Greek state to settle its domestic obligations, eg. to government employees and pensioners. Economists would dearly love this option because it’s not everyday you get to Gresham’s Law in action. The law, first formulated by a treasurer to Queen Elizabeth I, holds that “bad money drives out good” when the two circulate together, as people hoard the good currency and discharge their own obligations in debased coin. 0950 ET: You really didn’t need to read this to understand that that last Greek proposal has got no legs (at least not today), but I’m going to quote it anyway. BREAKING: Merkel says there will be no new developments on #Greece today: source — Reuters Top News (@Reuters) June 30, 2015 0940 ET: Well this is fun. Greece has jumped the gun and already sent to the creditors a proposal that adds up to a third bailout agreement, including two more years of financing and a debt restructuring to be carried out in parallel. Now, if Greece had gotten a euro for every time it had been told that there’ll be no new money before the conditions of the second bailout have been met, we probably wouldn’t be writing this blog today. We’d be writing about Greece’s sovereign wealth fund vying with Qatar’s for trophy real estate purchases in London. The proposal will be met with scorn and derision in Germany, where Angela Merkel just confirmed the bailout ends at midnight Central European Time (1800ET). 0925 ET: After all the rumors of last-minute dashes to Brussels by Tsipras to snatch another mind-numbing, inconclusive procrastination from the jaws of chaos, Anthee Carassava for The Times of London tweets… @atsipras secretary tells me PM still in Athens. — Anthee Carassava (@antheecarassava) June 30, 2015 Senior official tells me @atsipras will not get on plane to brussels without "certain deal." — Anthee Carassava (@antheecarassava) June 30, 2015 0920 ET: The day’s newsflow has once again highlighted an interesting feature of Greece’s relations with the rest of the Eurozone under its radical left-wing Syriza government: it’s been the weaker economies that have railed against it most. Here’s Italy’s Matteo Renzi on Twitter ramming home Juncker’s point about the referendum being a vote on the euro, rather than on points of detail in the bailout memorandum: The point is: greek referendum won’t be a derby EU Commission vs Tsipras, but euro vs dracma. This is the choice. — Matteo Renzi (@matteorenzi) June 29, 2015 And here’s Spain’s Mariano Rajoy becoming the first European leader to campaign openly for Alexis Tsipras’ ouster, telling Cope radio that: “If the referendum takes place and if Tsipras loses the referendum, this would be a good thing for Greece because the Greeks will have said yes, we want to stay in the euro, and we could negotiate with another government.” If the “no” side wins, Rajoy said “Greece would have no alternative but to leave the euro.” Both Rajoy and Renzi are desperate to make sure that their own radical anti-austerity, anti-euro parties–Podemos in Spain, and the 5 Star Movement and Northern League in Italy–don’t get any encouragement from Greece’s fate. The problem is particularly acute for Rajoy, whose government has to face re-election by December. A cynic would argue that it’s in Rajoy’s interest to make sure that Greece suffers horribly if it chooses to vote ‘no’, in order to scare voters away from Podemos, and reward his Popular Party for the #recoverynotrecovery that has taken place on his watch since 2011. 0835 ET: The Brookings Institute’s Douglas J. Elliott weighs in with a summary of the known knowns and known unknowns of the situation. That includes a warning that the U.S. economy could stutter if the euro devalues further against the dollar, helping Eurozone exporters to “steal demand” (as other economists term it) from U.S. producers. He also warns that the stock market could suffer if Europe’s economy slows again under the influence of a Grexit. But he also offers the most cogent response to those who think Greece will be better off outside the euro: 0825 ET: People of Greece, fear not. Alternative finance, in the form of Crowdfunder Indiegogo, is on the way to rescue you. Or maybe not. Only €1.532 billion to do by midnight. Help make it happen for Greek Bailout Fund @indiegogo http://t.co/GdTfTzunIH @J_Dijsselbloem @Schuldensuehner pic.twitter.com/j1KA7NOCFc — The son of a man (@TheSon_ofMan) June 30, 2015 0815 ET: While Europe has its lunch, it’s time to reflect and recap for a minute: Greece has confirmed it won’t pay the IMF €1.5 billion today. The ECB has for the first time admitted that Greece could end up leaving the euro–a significant deviation from its mantra for the last 15 years that the euro is irreversible. European Commission head Jean-Claude Juncker made a late-night offer to Alexis Tsipras of debt relief in October if he’d just change his mind, sign on the dotted line and campaign for a ‘Yes’ vote on Sunday. But answer came there none. We are still on course for default and worse. 0730 ET: Reuters reports that, in their telephone call last night, Juncker offered Tsipras the prospect of debt relief in October if he would send a written acceptance of the creditors’ conditions and promise to campaign for a “Yes” vote on Sunday. Answer came there none. Well, not in time to make a difference anyway. They’re also reporting a German government official as saying: “It’s now too late for an extension of the program.” 0720 ET: An interesting post here from Stratfor’s George Friedman, with a succinct summary of why sovereign default is such a messy business. Friedman–like Nobel prize-winners Joseph Stiglitz and Paul Krugman–comes out in favor of Greece leaving the euro and starting a new chapter of relations with its creditors. He also thinks that Greece’s redefinition of the moral dimensions of the debt argument under Syriza will lead to broader resistance against German economic leadership in future–and maybe to more countries seeking their own prosperity with their own sovereign currencies in future. Bold predictions. 0635 ET: For what it’s worth, European Commission spokesman Margaritis Schinas just told the daily press huddle in Brussels that his boss, Jean-Claude Juncker, spoke to Tsipras last night and asked him to reconsider his course, but wanted an answer by midnight. Which didn’t come. 0630 ET: Reports now on Greek television say that Athens is sending a new proposal to Brussels in a last-minute attempt to find common ground. Markets are loving it, but Teneo Intelligence’s research director Wolf Piccoli is having none of it: My take: this noise abt new #Greece's proposal is just another episode in the ongoing blame-game between Athens & BXL — wolf piccoli (@wolfpiccoli) June 30, 2015 even if we assume there is a deal and it's a BIG if, how can we get 6 parliaments to vote for ext before midnight today? let's keep it real — wolf piccoli (@wolfpiccoli) June 30, 2015 It’s a line of thinking that takes you back to half-remembered history lessons about 1914: once the mobilization orders went out, the formal declarations of war were pretty much formalities. Piccoli is right about the details, of course, but markets are reacting to (quite possibly false) signals of a shift in political will, which is impossible to measure with any precision, especially in the current circumstances. 0615 ET: One key element of the whole gamble over ‘Grexit’ is how much a newly-introduced Greek drachma would devalue against the euro. The general assumption is that it would tank in the short term under the weight of public panic. Some data, the GDP deflator, suggest the drachma wouldn’t have to fall much to find its equilibrium level, after the myriad cuts in the absolute level of wages and pensions in the last five years. But this chart from the think-tank Bruegel shows that Greece’s unit labor costs are still above those in Portugal, Spain and Cyprus, which suggests there’s still a competitiveness gap. Crushing austerity still hasn’t brought unit labor costs down to the level of Greece’s rivals. Christian Odendahl, chief economist the Center for European Reform think-tank in London, says the crucial variable would be the credibility of the new central bank and its success in tackling the enormous public debt legacy. “Only once the debt is out of the way or on a sustainable path will the economic equilibrium level prevail,” Odendahl says. That’s bad news for holders of drachmas like pensioners or the low-paid, as resolving the debt issue is sure to be a messy, drawn-out affair. 0535 ET: The key quote of Tsipras’ interview last night seems to have been a hint that he will resign if the Greek people votes to accept the creditors’ proposals on Sunday. The Financial Times’ rendition of the quote is: “If the Greek people want to proceed with austerity plans in perpetuity, which will leave us unable to lift our head…we will respect it, but we will not be the ones to carry it out.” Ever since Tsipras first mentioned the possibility of a referendum in April, the potential for it being a figleaf behind which Syriza retreats from its brinkmanship has been clear. It seems political common sense that, if it loses such a key vote, the government would resign and seek a new mandate. But that would require new elections. At present, there is no feasible pro-bailout majority in parliament. Pro-bailout parties New Democracy, Potami and PASOK have only 106 seats in the 300-seat parliament. 0520 ET: Is that a blink? Greek newspaper Kathimerini is reporting that the government is backing down and taking another look at the creditors’ proposals, with some members minded to accept them. Difficult to get excited about something so nebulous, not least because Theoharis’ tweet suggests just the opposite–that they’re preparing for the worst after a “no” vote. This, I fear, is going to be the tone of the day, with rumors and counter-rumors following in pretty quick succession. 0510 ET: The Greek twittersphere is abuzz after Harry Theoharis, a former secretary general in the tax administration and now a member of the pro-bailout, centrist To Potami party, tweeted that a team from the General Accounting Office is in the government headquarters at work on preparing the issuance of a new drachma. That shouldn’t surprise anyone in the circumstances but if it’s true, it jars badly with Tsipras’ claims last night that the vote is not about ‘Grexit’. Υπάρχει εναλλακτικό σχέδιο. Να πάρει το δάνειό μας ο ESM να πάρουμε περίοδο χάριτος και να επανεπενδύσουμε τα οφέλη στη χώρα #vouli — Harry Theoharis (@htheoharis) June 30, 2015 0455 ET: Losses in Eurozone periphery bonds (Spain, Italy, Portugal) starting to widen now after a weak opening by stock markets around the region. Italy’s FTSE MIB index is -0.7%, Spain’s IBEX 35 -0.8% and Germany’s DAX -1.4%. Even so, movements like that are hardly disorderly and trading volumes are barely above average. “The markets were becalmed (Monday) because the weight of expectation is currently skewed toward a “YES” (at the referendum),” says Deutsche Bank strategist Nick Lawson. “Belief in Draghi’s “whatever it takes” has drilled its way into the collective consciousness over the last few years.” (BUT – see below re. Coeuré) 0445 ET: Another problem with Varoufakis’ argument is that, while the E.U. Treaty has no process for expelling members from the Eurozone, it also specifically says the euro is the only legal currency for all countries without derogations (such as the U.K. and Denmark) and those who are yet to join (such as Sweden, Poland and Croatia). So, any attempt by Greece to issue a parallel currency will be on very shaky legal grounds, however understandable and necessary that may become. 0430 ET: You’ll be hearing from our lawyers, Greek Finance Minister Yanis Varoufakis tells the E.U. through the bullhorn of the euroskeptic U.K. Daily Telegraph, in reaction to comments Monday from European Commission President Jean-Claude Juncker and other Eurozone leaders threatened expulsion if Greeks vote “no” in Sunday’s referendum. “We are taking advice and will certainly consider an injunction at the European Court of Justice,” he says. “The E.U. treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable.” Technically he’s right, of course, but the key issue here is the ECB’s provision of euros to the banking system, which is a dead letter if the banks are insolvent or (a more immediate issue) don’t have adequate collateral to post. At the moment, the ECB has some €89 billion in emergency loans outstanding against collateral issued or guaranteed by the Greek government. Hard to see that being accepted after a ‘no’ vote, and impossible to see it after July 20, when Greece will almost certainly default on another €3.5 billion repayment to the ECB itself. 0415 ET: The other big overnight news came from Frankfurt, where board member Benoit Coeuré became the first top official of the European Central Bank to admit that a Greek exit from monetary union is possible in an interview with France’s Les Echos (text in French here). Coeuré has jammed Pandora’s Box wide open by admitting that euro is not, after all, irreversible.”The ECB doing whatever it takes to preserve the euro is no longer the same as doing whatever it takes to keep Greece inside the euro,” says Crédit Agricole CIB’s Frederik Ducrozet. Ever since President Mario Draghi’s famous promise in 2012, markets haven’t dared to speculate against other heavily-indebted members of the Eurozone. That’s still the case Tuesday morning: Italian, Spanish and Portuguese bonds have risen only slightly, suggesting that the markets still believe the ECB will stand by everyone else right now. But the next time there’s trouble in any of those countries, they’ll remember Coeuré’s comments. 0400 ET: Good morning everyone and welcome to a Europe where the sun has risen on Greece’s five-year bailout agony for the last time (the agony may continue tomorrow, but the bailout definitely won’t). Prime Minister Alexis Tsipras has confirmed that the country will not make a payment of €1.54 billion ($1.7 billion) to the International Monetary Fund today, which means the country will officially be in default as soon as IMF managing director Christine Lagarde formally notifies the board (which she has promised to do immediately, without the usual one-month grace period). It’ll be the first developed economy ever to default on the IMF. It’ll also be Greece’s sixth default since its war of independence from Turkey in the early 19th century, albeit its first since 1932, when pretty much everybody was doing it. (Read more on what Greece’s leaders are trying to achieve here).