Greece has become the first advanced economy to miss a payment with the International Monetary Fund in the IMF’s 71-year history. Here’s an abridged roadmap to help you navigate these turbulent waters without an advanced education in economics.
Greece was one of the economies to be hit hardest in Europe when Wall Street crashed in 2008. A year later it was clear the country had a lot more debt than it had been letting on (or could pay). Greece needed help — a lot of help — 320 billion euros worth (nearly $360 billion).
Letting Greece fail could have triggered a major new financial crisis, especially in the eurozone.
To prevent that the IMF, European Central Bank, and the European Commision (the so-called troika) together came up with a bailout plan worth 240 billion euros ($264 billion). Greece has been paying it back ever since.
In a word, very. Greece has little to no money to pay its EU creditors, let alone invest in Greek businesses or infrastructure projects. The unemployment rate is 25.6 percent—the highest of the OECD. Compare that to the U.S. where unemployment is 5.5 percent; or China with 4.1 percent unemployment. In the past five years, the economy has shrunk by a quarter. Wages have fallen. More than a third of Greeks are at risk of poverty—higher than any other eurozone country.
To get a bailout, Greece agreed to harsh austerity measures from its creditors. Think belt-tightening until your eyes start to bulge. Health care spending, slashed. Pensions,slashed. Government jobs, slashed. The cutbacks gutted the economy. The Economist says the measures were harsh, but necessary. Not everyone agreed. “Austerity, it turns out, has devastated Greece just about as much as defeat in total war devastated imperial Germany,” wrote Paul Krugman, a Nobel Prize winning economist.
As a result, some 300,000 people have left Greece. “A brutal economic depression, eye-watering unemployment, and the promise of austerity for years to come will do that,” Jason Karaian wrote in Quartz, noting that a similar decline in China’s population would amount to a loss of 34.7 million people. That’s like emptying the cities of Shanghai and Shenzhen. If you’re talking the U.S., it’d be like saying goodbye to the 8.2 million people who live in New York City.
Two reasons: Greece needs what amounts to a bridging loan. Greece owes the IMF 1.5 billion euros (about $1.7 billion) — and needed to borrow more money to make that payment. The troika has been demanding economic reforms economy as a condition for releasing the cash. The negotiations broke down when Greek Prime Minister Alexis Tsipras announced Saturday evening Greece would hold a national referendum on whether or not to accept the bailout terms. The ballot is on Sunday, July 5.
Greece wanted the bailout expiration date moved from Tuesday to Sunday. Greece’s creditors said no. The ECB also said it also would not extend aid to keep Greece’s banks open. Nervous Greeks rushed to their banks to make withdrawals, waiting in long lines at ATMs, “many of which ran dry amid the onslaught,” NPR reported. Greek commercial banks hemorrhaged cash.
On Sunday, Tsipras said there would be a “Bank Holiday break.” To prevent a full-blown run on deposits, banks would close until after the referendum. Withdrawals from cash machines would be limited to 60 euros – about $67 — a day. (Tourists, however, were exempt from this cap.)
An eleventh hour counterproposal from Athens couldn’t avert Tuesday’s default. When Greece failed to secure its next round of bailout funding, it couldn’t make its payment to the IMF.
Together, the missed payment and the yet-to-be-decided referendum have fueled speculation that Greece will get kicked out of the eurozone.
The impact of Greece’s economic woes extend well beyond its borders. With a population of roughly 11 million, Greece has fewer people than the U.S. state of Ohio.Greece’s economy is relatively small, too—just a 2 percent share of the eurozone’s GDP. But the economy is global— markets rattled all over the world over fears the country will plunge further downward, affecting everything from interest rates to retirement funds.
There’s also a potential domino effect in eurozone — if Greece is let off the hook for paying its debts, it’s not hard to imagine other indebted countries asking for the same thing.
Financials aside, think of Greece’s cultural treasures at risk. The Parthenon and amphitheater are two of the biggest attractions in a country where tourism accounts for around 18 percent of GDP. Investopedia’s Tim Parker noted that a continued out-of-control spiral could mean Greece going the way of Egypt, post-Arab Spring. Greece has neither the resources, nor capacity to care for its archaeological sites, or safeguard them from looters.
“If Greece defaults on their loans and declares bankruptcy, riots are likely to continue and intensify leaving the long-term sustainability of the government in jeopardy,” Parker wrote. “Add to it the fact that a bankrupt country doesn’t have the financial resources to protect and maintain their artifacts.”
And then there’s the Greek diaspora—Greeks who have emigrated to other parts of the globe. The largest population of Greeks outside of Greece is in the United States with around 1.3 million. The largest Greek population of any city outside of Greece is in Melbourne, Australia. Many of these expatriates have business ties to Greece.
Harry Ipermichou runs a business importing Greek wines and spirits to Australia. He said Greece’s woes have put his business in jeopardy.
“I supply all the restaurants all over Australia and if I run out of stock, what can I do?” Ipermichou told Australia’s SBS News.”Everybody’s shocked, we didn’t expect this. I know they got problems, but I didn’t expect banks close down.”
Tuesday’s missed IMF payment could be the first of many in the coming month. Greece’s next big payment is due in July, when it owes 3.5 billion euros.