Where Greece is heading next
Talks have broken down between the Greek government and its creditors and markets are panicking about the country’s fate. But what exactly will that fate be? As it turns out, even a missed 1.5 billion euro payment to the IMF on Tuesday may not mean the end of the world. The National Post’s John Shmuel takes a look at five ways that the Greek crisis could play out from here.
GREECE MISSES PAYMENT, BUT NO DEFAULT IS DECLARED
1Much of the focus this week has been on the payment Greece has to make by Tuesday (June 30). The Greek government is out of money and has made it clear it cannot meet that obligation. Technically, when a country fails to make a debt payment, it is deemed to be in default by credit agencies and bondholders. But the IMF is not a bond investor and does not necessarily have to declare Greece in default. The organization could instead label Greece as being in “arrears,” as long as Greece is still in negotiations to raise the money. In this scenario, Greece buys itself some time — but also joins a a group of bankrupt and unstable countries also in arrears to the IMF, including Zimbabwe, Sudan and Somalia.
GREECE MISSES PAYMENT, LEADING TO DEFAULT
2While Greece is almost certain to miss Tuesday’s payment, the Greek people will still have the opportunity in a Sunday referendum to accept the terms of a bailout packaged proposed by creditors. A “no” vote, however, would force Greek Prime Minister Alexis Tsipras back to the bargaining table, which could result in no deal and a dreaded default. European officials have framed a “no vote” as a vote to leave the euro. A Greek default would likely shake markets, but given all the firewalls and preparation the eurozone has made for such a scenario, the most damage would be done to Greece itself. The 2001 default in Argentina is a prime example. Tens of thousands of jobs were shed in the month the country defaulted, banks ran out of money and the unemployed roamed the country’s cities scavenging for scraps. A default brings the next two scenarios into play.
GREXIT
3This would be the most complicated and messy outcome, with the greatest number of unknowns. No country has left the euro since the currency was officially launched on January 1, 1999. The biggest immediate effect of a Grexit would be on the euro itself. A great deal of confidence in the euro is built upon the idea that once a member country joins, it does not leave. An exit would raise questions about whether more exits or even a breakup of the monetary bloc itself is possible down the line. For Greece, dropping the euro and having to adopt a new currency, most likely a new version of the drachma (the name for its previous currency) would create massive financial upheaval.
GREECE DEFAULTS, BUT KEEPS THE EURO
4While hardliners on both sides might push for Grexit in order to teach the other side a lesson, in reality it may benefit both sides for Greece to remain in the eurozone following a default. For the monetary union itself, letting Greece default but allowing it to keep the euro would avoid setting a dangerous precedent. For Greece, such a scenario would allow the country to forgo the expense of revamping its entire monetary system to adopt a new currency, though it would lose the potential advantages a new, devalued currency would provide.
LET’S MAKE A DEAL
5The final scenario is one Greece is very familiar with. While a default is dominating the headlines, Greece has been at the brink before, only for its politicians to agree to a last-minute backroom deal to accept a bailout. And maybe that’s what happens this time. After all the drama. It seems to be a Greek thing.