Greek Finance Minister (left) with the Prime Minister; photo courtesy Reuters

Greek Default Could Have Wide Impact
| published June 30, 2015 |

By Thursday Review staff

Greece will not make its $1.9 billion debt payment to the International Monetary Fund, according to Greek Finance Minister Yanis Varoufakis. Greece becomes the first developed nation to fail to make at least a partial payment to the IMF.

The Greek financial crisis is the worst any country has faced in decades. Greece suffered mightily during the Great Recession, and even as other European countries staggered out of the economic constriction, Greece remained one of the hardest hit. Social services and pension payments have sapped the cash from Greece’s weak economy, and several years of austerity measures have failed to produce a turnaround even as Greece borrowed billions from lenders worldwide.

Over the weekend things got worse in Greece, as panicked citizens began extending the use of credit cards to make purchases and as people attempted to withdraw large sums of cash from ATMs across the country. Some with the ability were moving cash quickly out of the country and placing it in foreign banks. On Monday, the government sought to avert a run on banks by limiting cash withdrawals to roughly $70 per account, per day. Still, millions stood in long lines to withdraw whatever they could from banks which some fear may collapse, or be forced to shutter for weeks. Some banks in Greece offered only limited hours, while others closed for the remainder of this week. Many people swarmed into grocery stores to stock up on essentials, while others waited in long queues for gas for their cars and trucks.

The crisis comes to a head after months of complex and tense negotiations over how to pay back billions in loans to foreign banks, international lenders and the IMF. Talks between creditors and government officials have often centered on austerity measures, including sharp cutbacks on social services, pension payments, and wages for government workers. Greek officials, led by a newly elected Leftist government, eventually walked out of the latest round of negotiations meant to avoid a catastrophe.

Over the weekend Greek Prime Minister Alexis Tsipras announced a nationwide referendum so that voters could decide the fate of the Greek economy. One likely outcome: Greece will withdraw from the European Union and declare itself disconnected from the euro. The vote may come as early as this weekend, though some economists say that by then the full impact of Greek default will be felt around the world. Some economists predict that a Greek withdrawal from the euro may precipitate a similar disconnection by cash-strapped Italy and Portugal. Others worry that the ripple effects could spread into the wider European economy and into the United States, as financial markets and banks adjust for the default and brace for the hit. The Dow was down more than 300 points on Monday as American investors reacted to the news from Greece and Europe.

The deadline for Greece’s debt repayment is today at midnight, and Greek officials have no way to make the payment. According to the terms of the original loan, no further payments or loans can be made to Greece after midnight. The scheduled payment is 1.6 billion euro, or roughly $1.9 billion U.S. Independently, banks and financial institutions can lend Greece more money, but most analysts say that they will be reluctant to do so under the current situation.

Even as Wall Street investors were spooked by the news from Athens, some European markets nudged up, boosted by rumors that a last minute deal might be reached between European Commission President Jean-Claude Juncker and Greek PM Tsipras. Varoufakis confirmed to reporters this morning that last minute negotiations were indeed taking place, but he seemed grim on the prospect of a solution before midnight. One possible short term resolution would be further austerity concessions by Greece in exchange for an extension on the debt payment.

Tsipras was elected on a wave of anger over spending cuts and harsh austerity measures, which many in Greece say have made the recession worse. But the IMF and a variety of other creditors worry that Greece’s heavy load of pension payments, social services, and government wages may inhibit recovery indefinitely, and make any chance of repayment of loans impossible. The cost of the nation’s debt is approximately 180% of Greek GDP. Currently, Greece owes more than 300 billion euros to lenders.

If Greece exits from the EU, it will be the first of the 28-nation economic partnership to withdraw. Conversely, even as many voters indicate they want no further part of the austerity program, and even as the vote seems to have become a referendum on the euro, government officials say they would prefer to remain a part of the European Union. Several Greek officials have said that the country will take legal action if other European countries give Greece the boot.

In the meantime the government will continue to limit ATM transactions. It is also restricting the use of credit cards, and has placed a temporary ban on moving money out of the country and into foreign banks. The country’s financial squeeze has impacted pensioners worst of all, as many older Greeks—living on a fixed pension—do not have access to debit cards and do not use credit cards. Some pensioners will be allowed access to limited amounts of cash at those banks which have remained open.

Related Thursday Review articles:

Greek Debt Crisis Spurs ATM Panic and Bank Closures; Keith H. Roberts; Thursday Review; June 29, 2015.

Greek Default Threatens European Economy; Thursday Review; April 18, 2015.