Report

Greece Is One Step Closer to Getting Kicked Out of the Eurozone

For the second time in three months, Greece delayed a loan payment to the International Monetary Fund. Now, Athens is inching closer to being kicked out of the eurozone.

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The Greek government said Thursday it will delay its payments of $335 million to the International Monetary Fund in the latest step in an escalating game of chicken that could end up with Athens kicked out of the eurozone.

The deadline for Greece to pay back its loan to the IMF was Friday. Prime Minister Alexis Tsipras has been in Brussels this week, trying to come to a deal with his creditors — the IMF, the European Union, and the European Central Bank — to pay off at least a portion of what Greece owes. Tsipras is a member of Greece’s left-wing Syriza party that promised, but hasn’t delivered, financial austerity.

With the delay of the payment, the cash-strapped Greek government now must pay the three creditors a payment of $1.7 billion by June 30. If it doesn’t deliver, the loan agreement with the IMF and European Union will expire, and Greece would soon run out of cash.

That could lead to the so-called Grexit — Europe kicking Greece out of its monetary union, an event once thought to be catastrophic for the world economy. A 2012 analysis by the Bertelsmann Foundation found the Grexit would send the global economy into a deep recession.

However, countries and financial institutions have had limited exposure to Greece since then. Now, it’s widely believed the fallout from the Grexit would be largely limited to Greece. There, its currency would drop and hyperinflation would take hold. Barclays predicts the drachma could lose up to 85 percent of its value against the dollar. The bank says this would lead to social unrest like the riots that occurred in 2010 when Europe’s austerity plan was implemented.

“The more radical elements within Syriza want to take this as close to the boundary as possible to see if the Europeans will blink,” Mujtaba Rahman, the head of the Eurasia Group’s European practice, told Foreign Policy. “But this fundamentally misunderstands the mood music in Europe.

“Creditors have been extremely flexible but are approaching the limit of what’s possible. Syriza has yet to recognize that.”

Indeed, European politicians seem to be girding themselves for Greece to leave. When the Greek sovereign debt crisis began in 2010, this notion was unthinkable to all but the most Euro-skeptic politicians across the continent. Now, the fallout from it is being considered in mainstream European policy circles and by the most influential leaders in Europe, including German Chancellor Angela Merkel. On Thursday, she conceded the sides are nowhere close to a deal.

Her admission follows comments from European Commission President Jean-Claude Juncker, who told a German newspaper earlier this week the monetary block could survive without Athens, but that it leaving would harm Europe.

“I don’t share the idea that we will have fewer worries and restraints if Greece gives up the euro,” Juncker said. If a country were to abandon the euro, “it would fix the idea in heads that the euro is not irreversible.”

The potential size of the Greek bailout package is $270 billion. Tsipras invoked an obscure IMF procedural provision, last used by Zambia in the 1980s, to buy his country more time.

The inability of the Greeks to pay even a small portion of its debt, and to institute long-needed structural reforms to its public sector and economy to help trim public spending, sent markets into a tailspin Thursday. The Dow Jones industrial average tanked 170 points after the news broke. European and Asian markets are expected to be lower Friday.

This is the second time in five years the Greeks had to kick their financial liabilities down the road. The first occurred in April, hardly a promising sign the Greeks would be able to find the cash needed to pay back the bulk payment due at the end of June.

Photo credit: Milos Bicanski/Getty Images

David Francis was a senior reporter for Foreign Policy, where he covered international finance. @davidcfrancis

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