It Starts With Default: How Greece’s Five-Year Financial Tragedy Will Reach Its Conclusion

It took five years, hundreds of hours of failed negotiations between Greece and its European partners, and accusations of backstabbing and financial tyranny to arrive at this inevitability: When the clock strikes midnight Wednesday morning, Greece will be in default to the International Monetary Fund, and its financial bailout from Europe will be no more.

Greek officials said Athens will not pay the $1.7 billion it owes to the IMF. Europe’s $270 billion bailout package to Greece will expire. Greek banks, shut off from the European Central Bank’s emergency credit line, will remain closed until July 6, a day after the referendum for the Greek people to decide whether to accept the proposed bailout. European leaders are demanding reforms to the Greek pension system on top of new taxes on the wealthy and local businesses.

Now that Greece will default, the larger question concerns the Grexit: Will Greece leave the European monetary union? That depends on the outcome of the referendum, which asks a simple question: “Should the agreement plan submitted by the European Commission, European Central Bank, and the International Monetary Fund to the June 25 Eurogroup and consisting of two parts, which form their single proposal, be accepted?”

Greek citizens have six days to ponder that query. A “yes” vote would be the public’s way of swallowing European demands, as the price of continued membership. A “no” vote would essentially be a public cry to strike out alone.

Monday afternoon, Greek Prime Minister Alexis Tsipras called on Greeks to do the latter.

As Greeks consider the referendum, they will have extremely limited access to international financial markets. Greek banks are closed all week, along with its stock market, and withdrawals are limited to 60 euros, or about $67, to prevent a run on banks. Other capital controls limiting money transfers meant to keep money in Greece are also in effect.

European Commission President Jean-Claude Juncker said that a “no” vote by the Greek people “will mean that Greece is saying no to Europe.” The Eurasia Group circulated a research note Monday giving Greece a 40 percent chance of leaving the eurozone, up from 30 percent last week.

“We think Greek voters will support the proposal of euro creditors with a ‘yes’ vote, paving the way for the emergence of a national unity government,” the note said. But it added that Greece probably doesn’t have enough time to pay the European Central Bank a 6.7 billion euro payment, or $7.5 billion, due in two weeks.

So even if the IMF crisis is somehow resolved, another is waiting to take its place.

The IMF, the European Central Bank, and the European Commission are Athens’s creditors. They have left the door open to continuing negotiations with Tsipras over the course of the week, but the relationship between all sides appears too poisoned to proceed.

Juncker said Monday he felt “betrayed” by Tsipras. And German Prime Minister Angela Merkel, who has been holding the hardest line against Athens, refused to back down from pension reform demands. In Berlin Monday, she said Greece must acquiesce to Europe.

“If these principles are not upheld, then, I am convinced, the euro will fail,” Merkel said. “It is important — and in this position there will be no change — that [Greece’s] own efforts and [European] solidarity continue to belong together.”

German banks, who Tsipras and his Syriza deputies blame for lending irresponsibly to Greece for years, said Monday that they are insulated from the Grexit. But because an event as cataclysmic as a country leaving the eurozone has never occurred, no one knows what will happen when markets open on July 6.

Financiers around the world gave a possible preview. Every major stock market index, including the Dow Jones Industrial Average, was down sharply on Monday.

“I don’t think anyone involved expected this game of chicken to get this far, and now there’s a chance everyone is going off the cliff,” an equity trader in Chicago told FP. He said that the uncertainty surrounding Europe’s currency, its political stability, and the prospect that Russian President Vladimir Putin could come to Greece’s rescue all have markets spooked.

“I’m not sure anyone knows where this could go,” he said. “I don’t envy Merkel.”

Standard & Poor’s downgraded Greek debt further into junk status Monday. The rating agency predicts there’s a 50/50 chance Greece will leave the euro.

The United States, for its part, has been largely relegated to the sidelines of the crisis. White House spokesman Josh Earnest said Monday that President Barack Obama spoke with his French counterpart, President François Hollande, and urged Europe to “develop a package of reforms and financing that would allow Greece to return to growth and debt sustainability.” Obama made a similar call to Merkel Sunday.

The sky won’t fall anymore than it already has when Greece misses its payment to the IMF Tuesday. Technically, it wouldn’t be in default — despite IMF chief Christine Lagarde’s recent proclamation that it would — but would be “in arrears” to the IMF. The fund would have to convene its board to officially declare Greece in default.

But that’s legal semantics; Greece will miss the deadline to pay its debt. According to the Eurasia Group, this is what some inside the Greek government wanted all along.

“Greek Finance Minister Yanis Varoufakis has long supported a rupture with Europe,” the group’s note says. “He was able to influence Tsipras despite opposition to a referendum from Greece’s Deputy Prime Minister, Yannis Dragasakis.”

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