Greece has missed the deadline to make a €1.6-billion ($2.2 billion Cdn) payment to the International Monetary Fund, putting it in default on its debt.
The IMF confirmed that Greece did not make its loan payment, but also said that Athens made a request to extend the payment. And the board will now consider that request "in due course," the IMF said in a statement.
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That means Greece is entering Wednesday without the protection of a bailout program from its eurozone neighbours, with its banks closed, capital controls in place, and a looming referendum.
The IMF is only one of Greece's creditors, and Tuesday's default could be one of many as other payments come due. The country owes almost $338 billion, with Germany being its biggest lender.
The United States said Tuesday evening that it is closely monitoring the situation and will keep urging all parties to keep negotiating.
"The nonpayment by the Greeks to the IMF this evening kicks off a long-standing and well-established process at the IMF for addressing arrears," the Treasury Department said in a statement.
"The United States will continue to encourage all parties involved to press forward with negotiations that put Greece on a path toward economic growth within the Eurozone on the basis of needed economic reforms and requisite financing that achieves debt sustainability."
While an unwelcome milestone for Athens, the default came as no surprise to investors after weeks of stop-start talks, and the euro only faded a little to $1.1135 US.
"There is so much uncertainty, speculation, truth and partial truth that many markets are in stasis, waiting to see which way this goes," said Emma Lawson, senior currency strategist at National Australia Bank.
'Greece remains at the negotiating table'
Just hours before the bailout was set to expire, Greek Prime Minister Alexis Tsipras proposed a two-year deal with the European Stability Mechanism, "to fully cover its financial needs and with parallel debt restructuring," the government said in a statement.
"Greece remains at the negotiating table," his statement said, adding that Athens would always seek a "viable solution" to stay in the eurozone, though it wanted to change the repayment terms.
But that proposal was stopped in its tracks, with the eurozone's top official, Jeroen Dijsselbloem, saying no new deal would be considered until Greece accepts the terms the EU has already proposed.
German Chancellor Angela Merkel ruled out new negotiations with Greece until after it holds its referendum on a proposal from creditors.
"This evening at exactly midnight central European time the program expires. And I am not aware of any real indications of anything else," she told a news conference, adding that Greece bears responsibility for the failure of talks.
Supporters of the Yes side to the Greek referendum — the side that wants to accept a deal and stay with the EU — were demonstrating in Syntagma Square in Athens as the deadline passed.
Eurozone finance ministers are set to talk Wednesday, but it appears they will be discussing "what's next?" An official said they'd be looking for a new plan for Greece.
Currently, the IMF is demanding that Greece, which is in the midst of a multiyear recession, slash its expenses by billions more dollars and slap heavy taxes on just about everything to raise revenue.
Finance Minister Yanis Varoufakis confirmed Monday that Greece would not come up with the cash to make the payment in time, though the government is believed to have cash on hand to pay government employees and pensioners at the end of the month.
Greece is "in arrears" by the IMF's standards — the official term for default.
Greece faces numerous deadlines for loan repayments over the next three months – including scheduled repayments to the IMF on July 13 and Sept. 4, payments to the ECB on July 20 and Aug. 20 and maturities of its own bonds throughout the summer.
It is the first time since the IMF was founded in 1945 that an advanced, developed economy has gone into default on an IMF loan, although Zimbabwe, Sudan, Cuba and others have done so in the past.
After months of wrangling and acrimony, the growing possibility that Athens could be forced out of the single currency brought into sharp focus the chaos that could be unleashed in Greece, as well as the danger that would arise for the stability of the euro.
"What would happen if Greece came out of the euro? There would be a negative message that euro membership is reversible," said Spanish Prime Minister Mariano Rajoy, who a week ago declared that he did not fear contagion from Greece.
"People may think that if one country can leave the euro, others could do so in the future. I think that is the most serious problem that could arise."
The EU has no legal way to force a member state to leave the currency union.
Scott Smith, foreign exchange analyst with Cambridge Mercantile Group says "all eyes are now focused on the outcome of this Sunday's referendum and Greece's future within the common-currency bloc."
French Finance Minister Michel Sapin, who has been most sympathetic to Athens in the negotiations, said in a television interview that negotiations could continue if Greeks voted Yes on Sunday, but added: "With a No, we go into an unknown territory."
Italian Prime Minister Matteo Renzi warned against turning the referendum into a personality contest between Tsipras and Merket or EU president Jean-Claude Juncker.
"This is not a referendum on European leaders. This is a run-off vote: euro or drachma," Renzi told the Italian business daily Il Sole 24 Ore.
"The Greeks do not have to say whether they love their prime minister or the head of the European Commission more. They have to say whether they want to stay in the single currency."
Greece has received nearly €240 billion ($333.4 billion) in two EU/IMF bailouts since 2010. Finance Minister Varoufakis argues that Athens has had no benefit from the money, which largely went to repay German and French banks, which had imprudently lent large sums to successive Greek governments.
The Greek economy has shrunk by more than 25 per cent since 2009 and unemployment has soared to over 25 per cent, including more than 50 per cent of young job seekers.
While the Tsipras government blames German-driven austerity for this economic disaster, EU officials note that other eurozone countries such as Ireland, Portugal and Spain that received bailouts for the state or banks have carried out similar reforms and returned to economic growth, even if unemployment remains high.
Much of the funds that Greece was given ended up in the pockets of lenders, not as actual economic stimulus.
That's why at least one market watcher says the most reasonable solution may end up being one few people are talking about: debt forgiveness. Since much of what Greece owes is to government and multinational groups like the IMF, individual investors won't be the ones left holding the bag.
"Forgive the debt and move forward," says Jack Ablin, the chief investment officer at BMO Private Bank. "Let's keep a European happy family because it's not going to cost us anything to do so."
Credit ratings agency Standard & Poor's lowered its sovereign rating on Greece to 'CCC minus' from 'CCC' late on Monday, saying the probability of Athens exiting the eurozone was now about 50 per cent. On Tuesday, Fitch lowered its rating further in junk status, from CCC to CC.
Tsipras put his own position on the line in a television interview on Monday evening, saying he would respect the result of the referendum vote but would not lead a government to administer "austerity in perpetuity."
"If the Greek people want to have a humiliated prime minister, there are a lot of them out there. It won't be me," he said in an interview on Greek state television as one of the biggest rallies seen in Athens in years was taking place.
The show of defiance came at the end of a day that started with stunned Greeks waking up to shuttered banks, long supermarket lines and overwhelming uncertainty over their future in the eurozone.
Juncker's final offer incorporated a proposal from Greece to set value-added tax rates on hotels at 13 per cent, rather than the 23 per cent in the lenders' original plan. It was not immediately clear whether there would be any additional changes.
If the offer were accepted, the eurozone finance ministers could adopt a statement saying that a 2012 pledge to consider stretching out loan maturities, lowering interest rates and extending an interest payment moratorium on eurozone loans to Greece would be implemented in October.
The offer would be conditional on a letter to Juncker, Eurogroup chairman Dijsselbloem, Merkel and French President Francois Hollande arriving in time to arrange an emergency meeting of the Eurogroup on Tuesday.