Greece, the weak link in the eurozone, is inching closer to defaulting on its debt. The country has been in a long standoff with its European creditors on the terms of a multibillion-dollar bailout. If the country goes bankrupt or decides to leave the 19-nation eurozone, the situation could create instability in the region and reverberate around the globe.
Greece became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances.
Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.
To avert calamity, the so-called troika — the International Monetary Fund, the European Central Bank and the European Commission — issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at today’s exchange rates.
The bailouts came with conditions. Lenders imposed harsh austerity terms, requiring deep budget cuts and steep tax increases. They also required Greece to overhaul its economy by streamlining the government, ending tax evasion and making Greece an easier place to do business.
The money was supposed to buy Greece time to stabilize its finances and quell market fears that the euro union itself could break up. While it has helped, Greece’s economic problems haven’t gone away. The economy has shrunk by a quarter in five years, and unemployment is above 25 percent.
The bailout money mainly goes toward paying off Greece’s international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold.
Many economists, and many Greeks, blame the austerity measures for much of the country’s continuing problems. The leftist Syriza party rode to power this year promising to renegotiate the bailout; Mr. Tsipras said that austerity had created a “humanitarian crisis” in Greece.
But the country’s exasperated creditors, especially Germany, blame Athens for failing to conduct the economic overhauls required under its bailout agreement. They don’t want to change the rules for Greece.
As the debate rages, the only thing everyone agrees on is that Greece is yet again running out of money — and fast.
Banks and markets throughout the country are closed until next week, after Prime Minister Alexis Tsipras interrupted last-ditch debt negotiations early Saturday with the announcement that he was calling a referendum for Sunday, July 5 on whether to accept the tough terms offered by international creditors.
On Sunday, the European Central Bank said it would not expand an emergency loan program that has been propping up Greek banks in recent weeks. But at the same time, the central bank did not cut off support entirely, giving the Greek government some extra flexibility in the coming days.
Greece will almost certainly miss a repayment of more than 1.5 billion euros, or $1.7 billion, to the I.M.F. that is due by midnight Tuesday.
But that won’t necessarily put Greece in default with the I.M.F. The fund, if it follows tradition in such matters, could buy time by simply declaring Greece to be in arrears.
Missing the payment, though, could make it even more difficult for the European Central Bank to continue extending emergency loans to Greek banks. The central bank is allowed to finance only solvent banks. Because Greece’s banks and the government are tightly linked, it would be hard to consider Greek banks solvent when their government is not paying its bills.
Greek banks are solvent on paper, but lending is practically at a standstill and they are not able to play the role they should in financing the economy.
On Sunday, the European Central Bank capped its emergency credit line for Greek banks at €89 billion. Most if not all of that money has already been used to cover withdrawals by customers, and there is virtually no money available for new loans.
Banks may open their doors next week, but it is very unlikely they will be operating normally for some time to come.
After Cyprus’s banking system collapsed in 2013, it took two years for the Cypriot government to completely remove restrictions on bank transfers. And Cyprus had a eurozone bailout program in place — which Greece, after Tuesday, probably will not.
And if a Greek bank goes bust, it could create havoc in the financial markets, because Greece has not yet put in place European rules for the orderly shutdown of failed banks.
Greece’s G.D.P. and Unemployment Rates in Europe
First quarter 2015 average; *Britain is the three-month average through February.
Source: Eurostat
Since Greece’s debt crisis began in 2010, most international banks and foreign investors have sold their Greek bonds and other holdings, so they are no longer vulnerable to what happens in Greece. (Some private investors who subsequently plowed back into Greek bonds, betting on a comeback, regret that decision.)
And in the meantime, the other crisis countries in the eurozone, like Portugal, Ireland and Spain, have taken steps to overhaul their economies and are much less vulnerable to market contagion than they were a few years ago.
Debt in the European Union
Gross government debt as a percentage of gross domestic product plotted through the fourth quarter of 2014.
Source: Eurostat
What’s more, the European Central Bank has erected powerful firewalls, by buying huge amounts of eurozone government bonds and by promising to purchase more if needed, making governments less subject to market whims.
Still, Greece may be linked to the world financial system in ways that may not be evident until it defaults on its debts or its banks collapse. So there is still potential for serious, unpredictable consequences.
Prime Minister Alexis Tsipras of Greece surprised the rest of Europe over the weekend by calling for a referendum that will ask voters whether to accept terms put forth last week by eurozone creditors — terms he says are unacceptable.
So far, the creditors have refused to grant an extension of the current bailout program beyond Tuesday. Without that extension, Greece has no chance to receive the €7.2 billion remaining in the current program. (The conditions under which Greece might get that money are what the months of fighting have been about.)
Any arrangement with Greece after the referendum would, as a legal matter, require new negotiations and a new program.
On Monday, Jean-Claude Juncker, the president of the European Commission, who has acted as a broker in the negotiations, called for Greek voters to accept the terms of the deal. That suggested Mr. Juncker would lay the groundwork for a resumption of talks on aid to Greece, which might eventually include discussions to meet Greek demands to lower the country’s debt.
At the height of the debt crisis a few years ago, many experts worried that Greece’s problems would spill over to the rest of the world. If Greece defaulted on its debt and exited the eurozone, they argued, it might create global financial shocks bigger than the collapse of Lehman Brothers did.
Now, however, some people believe that if Greece were to leave the currency union, known as a “Grexit,” it wouldn’t be such a catastrophe. Europe has put up safeguards to limit the so-called financial contagion, in an effort to keep the problems from spreading to other countries. Greece, just a tiny part of the eurozone economy, could regain financial autonomy by leaving, these people contend — and the eurozone would actually be better off without a country that seems to constantly need its neighbors’ support.
Others say that’s too simplistic a view. Despite the frustration of endless negotiations, European political leaders see a united Europe as an imperative. At the same time, they still haven’t fixed some of the biggest shortcomings of the eurozone’s structure by creating a more federal-style system of transferring money as needed among members — the way the United States does among its various states.
Exiting the euro currency union and the European Union would also involve a legal minefield that no country has yet ventured to cross. There are also no provisions for departure, voluntary or forced, from the euro currency union.
Investors may also still be betting that Greece will reach a deal with creditors before or after the referendum, particularly because polls indicate the majority of Greeks favor sticking with the euro.
That’s the billion-euro question. Right now, Greece must work out a deal to get some of the €7 billion to meet looming debt payments. It also has billions more in additional payments coming due later this year to the I.M.F. and the European Central Bank. As a result, Greece might need to try securing yet another multibillion-euro bailout package — its third since 2010.
Sunday’s referendum will test whether Greek citizens want to stay in the eurozone. New elections could also be held if Greece’s financial situation worsens. Or Greece could test the willingness of Russia or China to help should talks with Europe falter.
Some people are now saying that the real deadline is late July, after all the warnings that Tuesday was the make-or-break day. July is when Greece owes the European Central Bank a 3.5 billion euro payment. If there is no international bailout program in place by that time, and little chance of such a program being in the works, the central bank at that point would probably have to finally take Greek banks off life support.