Greece fails to make payment to IMF and the financial storm is not over
by Covey Son
The Gist:
Greece’s Finance Minister Yanis Varoufakis announced Tuesday that the embroiled Mediterranean country is unable to make its debt payment to the International Monetary Fund (IMF). Although it’s not a big surprise (as every European partner was expecting it) Greece is now looking at another deadline: July 20. That’s when Greece is supposed to make a payment of nearly €3.5 billion ($3.87 billion) to the European Central Bank (ECB).
The bailout program that has kept the country on life support also expired on Tuesday, leaving Greece with a choice: take another bailout or default on its loans, possibly prompting the EU to give Greece the boot.
You’d think with a bill that big, it’d be stupid not to take the money. But there are some costly strings attached to the deal. Now, Greeks face an ultimatum themselves. Tsipras announced Sunday that a national referendum will take place July 5 to decide whether the country will take the bailout or say “no” to making more concessions.
A crisis? Why is it such a big deal?
Because Greece currently owes more than €240 billion ($265 billion) to lenders including the IMF, ECB and key European powers like Germany. That’s a scary figure considering Greece’s debt is about 180 percent of its gross national product (GDP), the primary measure of a nation’s economy.
The crisis can be traced back to 2010, when post-recession Greece was headed toward bankruptcy. The troika — the IMF, ECB and the European Commission — provided the first of two bailouts to Greece to buy it time to rebound from the global recession.
By accepting the bailout, Greece had to slash spending on crucial social services while raising taxes, on top of closing tax loopholes and trying to make Greece attractive to businesses and investors.
While these funds kept Greece from the brink, its economy still could not dig itself out of the hole. Unemployment skyrocketed to over 25 percent — the highest in the EU.
The highest unemployment rate in the EU?
Yeah, and the Greeks were not happy to say the least. These conditions were ripe for the hard-left Syriza Party to win the January elections on a platform to oppose austerity and push better terms for Greece.
Alexis Tsipras, the Prime Minister from Syriza, and his finance minister have been in talks with European leaders like Germany’s Chancellor Angela Merkel and ECB President Mario Draghi, but the two sides have so far failed to reach an agreement over extending the bailout program.
As negotiations stalled, the toll on the average Greek only got heavier. On Monday, the government placed a €60 ($66) limit on daily bank withdrawals per person to prevent a run on the bank (withdrawing more money than the banks hold). Some experts call the ever-deteriorating situation a “humanitarian disaster,” in which vital goods may become scarce.
I don’t get it. How did they let a “humanitarian disaster” happen in Europe?
Remember when markets across the world tumbled in 2008?
Greece took a hard hit during the global recession and it’s still reeling from the fallout: in 2014, the Greek GDP was only about 74 percent of what it was just six years prior.
While some point to exuberant spending for Greece’s downfall, others blame the euro. Created in 1999 and implemented in 11 countries in 2002, the eurozone now has 19 member nations using a single unitary currency. Greece was part of the first 11 members, but reportedly lied about its budget deficit, which was slightly higher than the EU’s cutoff.
What can Greece do to get out of debt?
Well, it could accept a new deal with the European leaders to ensure its banks have enough money for the time being. However, that is a procedure that some, including the Syriza Party, say will kill the patient.
Austerity opponents argue that cutting government spending and raising taxes will not help boost the country’s already struggling economy. In fact, the Syriza Party won the election in early 2015 on a platform to reject further economic reforms imposed by Greece’s creditors.
Hours before the clock ran out to pay back the IMF, Tsipras submitted a proposal to extend the existing bailout program, which expired as of Tuesday, for another two years. The new proposal did not include any of the austerity measures imposed by the EU, and was immediately rejected by German Chancellor Angela Merkel, who has been a key player in the negotiations, until the Greek referendum takes place.
What is a “Grexit”?
Greece could technically default on its loans and decide not to pay any of them back, which some euro leaders say implies a “Grexit,” or Greece walking out of the eurozone. That’s obviously not such a simple solution.
In the event of a “Grexit,” Greece would need to revert back to its pre-euro currency, the drachma. The immediate effect of this transition is a 40 percent drop in the Greeks’ purchasing power, which means their money will be worth 40 percent less than what it used to be. In addition to a depreciated currency, Greece will find it more difficult to borrow more money and possibly cut off from additional support from the ECB.
What’s with this referendum?
On July 5, Greeks will get to vote whether or not they accept additional austerity measures from the troika — you know, the IMF, the ECB and the European Commission. It’s difficult to call which side voters are swinging, as protesters advocating for both sides are rallying in the streets of Athens.
Tsipras is currently pushing voters to shoot down proposed austerity measures. However, if the “yes” camp wins, it is likely Tsipras will resign from power, which would trigger a special election before another deal can be reached.
Keep in mind, the referendum is just about the terms of the new bailout and a “no” vote does not for sure indicate a “Grexit”.
How likely is a Grexit and why is the EU so up in arms about it?
As he continues to whip the “no” votes, Tsipras maintains that Greece will stay in the EU even if it defaults on its loans.
“They will not kick us out of the eurozone,” he said, according to a translation of an interview with ERT TV. “Let me explain why: because the cost is immense.”
To some extent, he’s right; EU leaders are indeed worried about a “Grexit”, but not because of the immediate cost of losing all the money spent on keeping Greece alive.
Rather, leaders are more concerned with “containing” a default-and-exit scenario in Greece. The very notion that a member of the EU can leave — and thrive economically — is a grave threat for the very existence of a single currency.
Why should I care if I don’t live in Greece or Europe?
The chance that Greece might walk out the door — and the smaller chance the eurozone will subsequently collapse — already has the money market nerds anxiously biting their nails in anticipation.
Analysts and commentators say a Grexit might signal to other European countries struggling with debt — Spain, Portugal or Ireland — that going about debt management on their own may not be such a bad idea. S&P 500, an American stock market index, said the likelihood of Grexit was at 50 percent.
Because Greece failed to repay the $1.72 billion loan to IMF and shut down its banks for the week, the euro fell to 0.89 cents to the dollar June 29. And when you see what’s coming next — the referendum on Sunday and another deadline for Greece to make a €3.7 million payment on July 20 — it may not be over.
More Information:
- Vox: Milton Friedman on EU failure
- Timeline: Greece’s debt crisis
- CNBC: Gartman says Euro is “doomed to fail”
- New York Times: Greece’s debt crisis sends stocks falling around the globe
