Greece is getting dangerously close to defaulting on its multibillion-dollar debt. For a long time now, the country has been in contention with its creditors in the euro zone on the way forward to solving the debt crisis.
Mounting Greek Crisis Triggers Fears of an Exit from the EU
On July 1, 2015, Greece Prime Minister Alexis Tsipras accepted some of the conditions offered by its creditors but called for a referendum for the people of Greece to vote on whether the country should accept the stringent demands of its creditors.
Making the announcement on Greek TV, he urged the people to vote for a ‘No’ on the new deal offered by European creditors in a last minute effort to improve his negotiation position.
On Tuesday, June 30, Greece once again failed to pay its debts to the International Monetary Fund and is hoping to put together a deal that would see the country offered more bailout money as it struggles to restructure its economy.
According to BBC’s correspondent in Europe, Chris Morris, Mr. Tsipras is looking to amend the proposal by its creditors but accepting this proposal will depend on whether the creditors can give Greece a third bailout of about €29.1bn over the course of two years.
However, Germany is skeptical about giving Greece any new bailout money until after the referendum, which is set to take place on Sunday, 5 June 2015.
The start of the crisis
Greek got into the current debt crisis in the wake of the 2009 financial crisis. However, when Greece joined the euro zone in 2001, it continued to underreport its deficit, caused by high public spending, corruption and tax evasion. Banks also offered low-interest loans in spite of the country’s financial weakness.
The global financial crisis hit Greece the most, making it impossible for the country to finance its economy. In 2010, the European Central Bank, IMF and European Commission offered Greece a bailout of $143 billion and in 2012, an additional $170 billion loan. The loans were accompanied by strict austerity measures that required deep budget cuts and tax increases, which sent the Greek economy into a massive depression.
Reports indicate that country’s GDP has fallen by more than 25 percent since the 2012 bail out.
The government of Alexis Tsipras and finance minister Yanis Varoufakis came to power at the start of 2015 with a promise to get the country out of the country but efforts have not been successful.
In an interview with Bloomberg TV, Yanis Varoufakis said Greece cannot pretend to be in a position of being able to pay its debt and promised to quit if the people do not support the government in the upcoming referendum.
Given that Greece failed to pay its 1.5 billion euro debt, which was due on July 1, 2015, it technically defaulted on its debt. However, given that the IMF loan is not a private debt, the consequences of the default are not as grave as they would have been had Greece defaulted on private bank loans, according to New York Times reporters.
Michael Hewson, chief markets analyst at CMC Markets in the UK said that a Greek exist from the euro zone is unlikely as the country benefits greatly by having European Union membership. However, if it stays, it must adhere to creditors’ demands for austerity measures. Whether Greece leaves or stays in the zone, there are no straightforward answers.
Many fear that a Greek exist could prompt other countries including Italy, Spain, and Portugal to leave the Eurozone, a move that could be financially disastrous for the zone and the world’s financial system.
The disintegration of the Eurozone could disrupt the world’s economic output, 20% of which is attributed to the zone as a trade bloc.
If the crisis culminates to an exit, the European and global bonds market worth multi-trillion-dollars could collapse, affecting the retirement investments of millions of people around the world.
Although Greece is not a major player in the Eurozone, investors continue to abandon financial stocks in fear of a contagion that could spread to other economies in Europe and globally.
So far, European stocks are experiencing their biggest decline since 2011, as banks close and capital controls are imposed in Greece.
Banks are among the 10 worst performing stocks on the STOXX Europe 600 index, with their stock value falling by as much as 9%.