The unlikely has finally happened: Greece has officially missed out on its 1.5 billion euros to the IMF. As a result the IMF also reported it will cut off any IMF financing until Greece pays back this sum. So Greece has defaulted on its latest debt payment. And the current speculations are that the ECB may also the end emergency lending to Greece’s banks.
For now the Greeks are still on the hook for a total debt of 323 billion euros, in which 60% is owed to Eurozone, 10% to the IMF, 6% to the ECB and the rest is spread around bonds, loans and other banks. For a country with a GDP of around $240 billion, a GDP per capita of $22K for 11 million people, this means the current debt is nearly 1.5 times the country’s GDP or in other words each citizen owes $30K – a high number that isn’t likely to be paid back for decades to come. The problem isn’t the high debt as much as it’s the high foreign debt accompanied with a downward spiral of income.
In order to climb out of this rabbit hole, the Greeks led by Alexis Tsipras, will have to accept the terms of the current bailout plan as laid out by so-called troika of lenders. The vote of this decision is set for next week. For now, it seems the Greeks are still inclined to stay in the Euro zone and keep the Euro — better to the devil you know than the devil you don’t…
The current situation also means the Greek banks are in default without additional funding from IMF and ECB. And given the reaction in Greece, this could mean that a bank run could put all Greek banks out of business.
The referendum is likely to show that the Greeks are willing to leave the EU so we will get a few more months/years of will they won’t they leave – something we have seen too often in American movies and sitcoms (the whole will they won’t they get together, only here it’s a matter of separation).
But perhaps Greece leaving the Euro could be the lesser of two evils. Think about it, not paying back all its debt, and having the possibility to control your own monetary and fiscal policy could enable the government to raise employment. Don’t get me wrong, it’s still going to be harsh times in Greece for years to follow with no possibility to raise funds in the markets, weak currency and rapidly high inflation. Also, the banks have been on life support for five years and this is a huge problem that will need to be addressed.
Down the line perhaps it’s like taking off a band aid – at first it will hurt but then things will get better. At least under this scenario, there is a possible recovery for Greece way-way down the line than remaining in the EU and continue to pay off debt and suffer from high unemployment.
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