Economy
GREECE DEFAULTS. NOW WHAT?
from The Atlantic:
The country’s inability to pay its debt or reach a deal makes it the largest nation in history to be in arrears to the IMF.
What happens now?
Greece’s missed payment to the IMF is a milestone—it’s both the first time a developed country has missed such a payment, and the first time a Eurozone country has defaulted on its debt. (Or it’s “in arrears”—as Bouree Lam explains below, the IMF isn’t using consistent terminology.)
But that doesn’t mean automatic expulsion from the Eurozone. Yanis Varoufakis, the country’s finance minister, made the case on his blog three years ago that “a defaulted Greece can easily remain in the Eurozone,” and that in fact “Europe’s optimal strategy is to let Greece default.” The Lisbon Treaty, which forms the legal basis of the European Union, actually makes no provision for a member’s expulsion. A 2009 legal analysis by the ECB found that, “while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU [the European Monetary Union], would be legally next to impossible.”
In practice, though, Greece still has to pay its bills with some kind of money—and it’s running out of euros. At the stroke of midnight, there were still euros in Greek banks, but how long Greece can remain on the currency depends, in part, on how long they can keep euros in their coffers—to wit, whether Greece can scrape together new infusions of euros before it runs out entirely. As CNBC explained:
If the Eurosystem—the European Central Bank and the central banks of euro zone members—refuses to finance Greece by halting the release of more emergency loans … there could be a rapid withdrawal of deposits from Greek banks. Athens would then need to refinance the banking system by creating a new currency to do so.
That’s the “fast exit” option, which Greece could slow down by closing the banks (as it already has) to delay withdrawals. In the “slow exit” option, Greece’s creditors don’t demand their deposits back immediately, but if Greece fails to secure outside sources of financing as public bills such as pensions and state salaries come due, “Greece could substitute ‘IOU’s’ for euros in some of its payments,” per CNBC. In the short term, these would in effect become a parallel currency. As the Wall Street Journal explained, “Over time, euros would disappear from circulation because people would hoard them as a store of value—and people would spend the government IOUs. De facto, the drachma, whether or not it would so be called, would become the main means of exchange.”
