Greece Likely To Default This Week
On Saturday, Greek Finance Minister Yanis Varoufakis failed to garner support for an extension of a bailout deal, raising the likelihood that his nation would have to default on a €1.55 billion ($1.73 billion) payment due to the International Monetary Fund (IMF) on June 30 this week.
The default would be the largest case of nonpayment since the IMF was created in 1945. On Sunday, the European Central Bank said it is keeping emergency loans to Greek banks unchanged at Friday’s level.
Late Friday, Greek prime minister Alexis Tsipras announced that a referendum would be held in Greece on July 5 in order to vote on the reforms proposed to Greece by its creditors as part of a possible bailout extension, according to Bloomberg News.
The European Central Bank has scheduled emergency talks as Greece faces debt default. However, if voters fail to approve those reforms, it could set Greece on a dangerous path that could lead to Grexit, reports The Economist.
“With no source of financing its default on the IMF would be followed by a further missed payment, to the ECB, on July 20th. That would presumably oblige the ECB to declare Greece in default, and to withdraw its ELA entirely. Banks would collapse, and to pay salaries and pensions Greece would have to turn to alternative forms of payment, perhaps beginning with IOUs or informal “scrip” currency. The exit door from the euro would be wide open,” says an editorial in the paper.
The Greeks are the main losers in a default situation, says economist Mohamed al-Arian, but the IMF loses as well.
“It would fuel both internal and external criticism that the fund had been co-opted by European politicians, adding to longstanding worries about the slow progress in reforming its outmoded governance, representation and some of its practices (including the ‘tradition’ that the head of the institution always be a European). And it would make the IMF more hesitant to lend aggressively in other crises,” he argues.