Talks have divided between the Greek government and its creditors and financial markets are panicking about Greece’s fate.
Whether Greece leaves the eurozone or not, it is going to a world of pain
Chidley: The economic crisis in Greece will deepen, leading to more social unrest. But will the Greeks\’ pain become Europe\’s – and also the world\’s? Continue reading
But what exactly will that fate be? The country has never been this near to default since joining the eurozone, but more concerning, could be setting up to depart the euro completely. It might be the first member state to drop the currency if so.
Stocks and bonds are plummeting all over the world on the news. Most are envisioning a doomsday scenario where Greece defaults Wednesday morning and helps to create market panic, perhaps even triggering an economic crisis.
But a missed payment by Greece (the country must pay the International Monetary Fund US$1.7 billion by Tuesday night) isn’t necessarily the end of the world. Here’s a glance at five ways that the Greece scenario could engage in this week.
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Greece misses payment, but no default is declared
Much from the focus now has been on the payment Greece needs to make by Tuesday (June 30). The Greek government no longer has sufficient money and made it clear it cannot meet that obligation. Technically, when a country fails to pay on debt it owes, it has defaulted with that debt and is declared as such by credit reporting agencies and bondholders.
But the IMF isn\’t a bond investor and doesn\’t necessarily have to declare Greece in arrears. The organization could instead label Greece to be in “arrears,” so long as Greece is still in negotiation to raise the money. Within this scenario, Greece buys itself some time – but also joins a several bankrupt and unstable countries also in arrears towards the IMF, including Zimbabwe, Sudan and Somalia.
Greece fails to secure funding, a default is declared
Greek Prime Minister Alex Tsipras has asked his government to carry a referendum by Sunday to ensure that citizens can vote around the proposed bailout package.
A “no vote” would force Tsipras to carry on his hard bargaining, that could potentially lead to no deal along with a dreaded default. European officials have framed a “no vote” as a vote to leave the euro.
A Greek default would likely lead to a global risk asset sell off, but given all of the firewalls and preparation the eurozone has made for such a scenario, probably the most damage would be done to Greece itself. The 2001 default in Agrentina is a prime example. Tens of thousands of jobs were shed in the month?the nation defaulted, banks ran out of money and also the unemployed roamed the country’s cities scavenging for scraps.
The Bank of Greece has stated that a default would essentially?regulate the nation to third world status.
Greece defaults, exits the eurozone and adopts a new currency
This would be the most complicated and messy outcome, using the greatest number of unknowns. No country leaves the euro because the currency was officially launched on January 1, 1999. Greece was one of the early adopters of the currency, formally being admitted to the eurozone in January 2000.
The biggest immediate effect a Grexit would have would be on the euro itself. A lot of confidence within the euro is built upon the idea that once a member country joins, it doesn\’t leave. An exit would raise questions about whether more exits or even a break up of the monetary bloc is possible down the road.
For Greece, dropping the euro and achieving to adopt a new currency, most likely a new form of the drachma (the name for its previous currency) would produce a lot of upheaval. The private sector finances much of its business with euro-denominated loans, many from non-Greek banks, even though many Greeks have money stored in bank accounts outside of the country.
Greece defaults, but doesn’t leave the eurozone
A Greek default is widely viewed as leading to an exit from the eurozone so the country can adopt a brand new currency, significantly devalued from the euro, and use it to become a competitive economy again. This was done when Argentina defaulted in 2001 and unpegged the peso in the U.S. dollar.
But Greece doesn’t need to exit the eurozone even just in a default. The?legal basis for a eurozone exit isn\’t entirely clear. Even though hardliners on both sides might want Greece to leave the eurozone to teach the other side a lesson, it might benefit both sides for the country to stay in the eurozone.
For the monetary union itself, letting Greece default but letting it keep the euro would avoid setting an unsafe precedent.?For Greece, this type of scenario would allow the country to forgo the expense of revamping its entire monetary system to adopt a new currency.
A last second deal saves Greece
The final scenario is a Greece is very familiar with. While a default is dominating the headlines, Greece continues to be at the brink before, just for its politicians to agree to a last-minute back room deal about accepting a bailout.
And maybe that’s what happens this time. In the end the drama. It seems to be a Greek thing.