(VOVworld) – June 30th is the deadline for Greece to pay its debt to the IMF. When the bailout program expires, no rule says Greece has to leave the Eurozone if it defaults, but the chance of it staying is small. Although Greece contributes less than 2% to the Eurozone’s GDP, its exit would set a bad precedent and seriously damage the Eurozone’s image.
Thousands of supporters of Prime Minister Alexis Tsipras's government gathered outside Parliament to call for a "no" vote in the referendum scheduled for July 5. Louisa Gouliamaki/ Agence France-Presse — Getty Images
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Greece, whose economy has shrunk by a quarter in six years, owes 320 billion euros, equal to 175 percent of its annual economic output. Athens must pay 1.5 billion euros to the IMF on June 30, or declare bankruptcy. If it is unable to pay its debt on time, Greece will not receive any further aid from the IMF, which means it will have to print its own currency and leave the Eurozone.
Greece’s problems affect the global economy
As Greek people rushed to banks to withdraw their money, the government shut down the banking system and imposed capital controls to protect the financial system until July 6. The European Central Bank (ECB) has frozen emergency loans for Greek banks.
Although Greece accounts only a tiny faction of the global economy, its financial instability has affected global financial markets because it’s a member of the Eurozone. The Asian securities index plunged right after the failed negotiation between Greece and its creditors. Japan’s Nikkei 225 index fell 2.9%, China’s Shanghai index lost 7%, and Hong Kong’s Hang Sheng index retreated 2.6%. S&P/ASX 200 of Australia and Kospi of South Korea also decreased. The euro has devalued compared to other hard currencies. Gold prices have slightly increased because investors have traded high-risk assets for more stable vehicles like the USD and gold.
Can a referendum keep Greece in the Eurozone?
The Greek parliament has agreed to hold a referendum on July 5 on the draft agreement proposed by Greece’s 3 creditors. Their plan proposes a continuing austerity program in exchange for another bailout. Analysts say they doubt it will help Greece avoid declaring bankruptcy and leaving the Eurozone because the Greek people can no longer bear the austerity policy. Over the last 5 years, their living conditions have seriously deteriorated. The unemployment rate has reached 26%. 50% of Greece’s youths are unemployed. Regardless of the referendum’s outcome, there is little hope Greece’s shaky economy can recover.
The question is not whether the EU will give more money to Greece, but what Greece will do to escape its continuing crisis.
Consequences if Greece leaves the Eurozone
The EU has prepared a scenario for Greece leaving the Eurozone. It will bring Greece into a very difficult period. With a new domestic currency, which has a lower value than the euro, Greece will bog down in a deep and long recession.
A bad domino effect will be caused by a Greek bankruptcy. The financial markets of weak economies will stagger. Investors will massively withdraw money from these countries. A Greek exit will threaten the EU’s common prosperity.
In order to keep Greece in the Eurozone to maintain regional stability, EU creditors may make a concession and agree to help Greece after the June 30 deadline. EU countries will face great pressure from their citizens not to use their money for a bailout and it will set a bad precedent for other nations who want to receive aid without cutting their expenses.