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Greece defaults on IMF loan. Now what?

The financial crisis unfolding in Greece is unprecedented, and few experts are prepared to speculate on just what will happen next except to say that - whether it be an exit from the eurozone or a new bailout agreement with additional austerity measures - it won’t be pretty.

'We’re now into territory that no one has a map for,' says one expert

Greece misses loan payment

7 years ago
Duration 2:50
Despite a last-minute request by Greece, the deadline came and went with more than $2 billion left unpaid

The financial crisis unfolding in Greece is unprecedented, and few experts are prepared to speculate on just what might happen next now that the country has defaulted on one of its many sizeable debts.

"We're now into territory that no one has a map for and there are no instructions for, and, you know, [that] no one has a very good plan for," and Phil Triadafilopoulos, an associate professor of political science at the University of Toronto

Greece missed the Tuesday deadline to make a 1.55 billion euro payment on its debt to the International Monetary Fund, and is now officially in arrears.

Greece pitched a two-year deal to restructure its debt just hours before the Tuesday deadline. However, German Chancellor Angela Merkel seemed to throw cold water on the idea, saying there would be no further negotiations with Greece until after Sunday's referendum, in which Greeks will decide whether they want to accept their creditors' bailout conditions or exit the eurozone.

"It's just incredibly fluid," said Michael Klein, an economist at Tufts University who has worked at the U.S. Treasury Department.

Uncharted waters

Greece is the first developed country to default on its IMF debt since the fund was created in 1945, and entering arrears puts it in the same league as countries such as Zimbabwe, the last to miss an IMF payment, Sudan and Cuba.

A default on the IMF loan makes Greece ineligible for further IMF assistance until it pays down its debt, but it also has ramifications for its other creditors, to whom it owes a total of almost 243 billion euros ($338 billion Cdn), and is also the first step toward a possible exit from the eurozone and possibly the European Union. 

Either of these scenarios would bring Greece's economy to a screeching halt.

There has already been a run on the country's banks, with Greeks lining up in recent weeks to drain their accounts. Even with Monday's implementation of capital controls and a 60 euro a day withdrawal limit, it will be extremely difficult to carry out day-to-day business.

"Imagine if you all of a sudden were limited to taking $67 US out of the bank each day, and just think about the bills you get in your mail, and you're just unable to pay them," said Klein.

"So, even if people have stashed away a lot of money, which is likely, people want to hoard their money in times of great uncertainty like this … It's just going to be a terrible situation."

Klein suggests that Greece might bring in a temporary currency, which would in turn create a black market for the euro. But he added that whatever happens, it's all uncharted territory

Demonstrators in Athens wave Greek flags during a rally organized by supporters of the Yes side in the upcoming referendum, which will decide whether Greece accepts a new set of bailout conditions or exits the eurozone. The Yes side supports staying within the currency union. (Petros Karadjias/Associated Press)

"It's sort of out of the range of our experience," said Klein.

Many Greeks — including those living abroad — are already keenly feeling the effects of the crisis. Greek businessman Alexander Alexakis is the vice-president of Canadian operations at Krinos Foods, the biggest importer of Greek food products to Canada. He said the latest developments came as a big surprise.

"Everybody's at a loss, they don't know what to do next," he said.

He said his suppliers in Greece don't want him to pay them because they can't access their funds from Greek banks.

"So, I guess they're going to wait it out until next week to see if the controls will go away," he said.

Alexakis said his company has enough stock to last three months, but said the situation will worsen if Greece's finances don't get some kind of stability soon.

"We're going to be in deep trouble supplying the market here."

Potential for 'troubling' instability

Even if Greece comes to a new bailout agreement with the European Central Bank, it will likely still have to endure several more years of painful austerity measures, which in turn would mean more years of social and political unrest. 

The real concern is that people look around for the next slowest antelope — who will fall next?-Michael Klein, economy professor, Tufts University

If Greece is forced to leave the euro and introduce a new currency, which Triadafilopoulos predicts would be significantly devalued against the euro, that will make it difficult for Greece to import food and medicine, among other essentials.

"If people are deprived of access to food and medicine, they're not likely to be very happy," he said.

"Add to that a place that's been racked by civil war within the lifetime of many people going through this yet again, and an intensified left-right split when the party system of the last few years collapsed, and you have a situation that could be very unstable, very troubling."

Domino effect

If Greece leaves either the euro or the entire European Union, that could also create a domino effect on other heavily indebted European countries that are also chafing under central bank rules and punishing austerity measures.

"The real concern is that people look around for the next slowest antelope — who will fall next?" said Klein.

Klein said this could be the first of many exits from the eurozone, adding that the international consequences would be much more dire if a much bigger country were to leave.

"It all depends on how and if the contagion spreads," said Klein.

Slight silver lining, to some

Despite the chaos, some, including Greek's left-wing governing Syriza party, see a Greek default as a positive step for a country exhausted by years of austerity.

"They're saying 'Listen, we don't know what's coming, but at least it will be temporary and at some point through devaluation and other means we'll be back on our feet, and at least have control of our own fate'," said Triadafilopoulos.

Prime Minister Alexis Tspiras's description of the ECB's proposals as "humiliating" to Greece is a powerful trope that will resonate with many Greeks, he said.

Regardless of what happens in Sunday's referendum, all options are bleak.

"For a political scientist, this is extremely interesting. But for a Greek citizen, it's clear from media coverage and others that the uncertainty is very hard to live with," said Triadafilopoulos.

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