Greece’s last-minute overtures to international creditors for financial aid yesterday (30 June) were not enough to save it from becoming the first developed economy to default on a loan with the International Monetary Fund. The situation remains so uncertain that even the Sunday referendum, on whether to accept the aid, hangs in doubt.
The IMF confirmed that Greece had not made its scheduled €1.6 billion euro loan repayment to the fund. As a result, IMF Managing Director Christine Lagarde will report to the global lender’s board that Greece is “in arrears”, the official euphemism for default.
IMF spokesman Gerry Rice said Greece can now only receive further funding from the global lender once the debt is met. He confirmed that Greece asked for a last minute repayment extension earlier on Tuesday, which the fund’s board will consider “in due course.”
Fears of a Greek default have unnerved financial markets on concerns that it would ultimately lead to the country’s exit from the euro. The fate of Greece’s membership in the 19-nation currency bloc still hangs in the balance ahead of a referendum on 5 July, which Prime Minister Alexis Tsipras surprisingly proposed on 27 June, rejecting as “blackmail” the proposals of the lenders.
A one page letter from Greek Prime Minister Alexis Tsipras to the chairman of the Eurogroup of finance ministers of the eurozone said Greece was “fully committed to service its external debt in a manner that secures the viability of the Greek economy, growth and social cohesion.”
But it made no mention of the conditions set by Greece’s three lenders – the European Commission, the European Central Bank and the IMF – for releasing frozen aid to avert defaulting on the IMF repayment. Instead, Tsipras cited legal grounds for requesting a two-year loan of an unmentioned amount.
“The loan will be used exclusively to meet the debt service payments of Greece’s external and internal debt obligations,” he wrote. It was not clear whether that includes payment arrears to Greek government suppliers, civil servants and others.
The letter went on to say, “Until this loan is agreed and in force, Greece requests for the programme to be extended by the Eurogroup for a short period of time in order to ensure a technical default is not triggered.”
Scrapping the referendum?
Before the payment deadline, during a call with European counterparts Greek Finance Minister Yanis Varoufakis indicated that Athens might scrap the upcoming referendum if a deal was reached.
In a telephone conference of eurozone finance ministers, other countries asked Varoufakis how their new proposal for a two-year aid package would be linked to the controversial referendum.
“In response, he said there was a willingness to take a look at the question in the referendum, or update the referendum, or suspend it,” a source told AFP on condition of anonymity.
“All that depended on the signal the Eurogroup would give to this new proposal.”
Malta’s Prime Minister Joseph Muscat reportedly also told parliament yesterday that Greece had offered to suspend the referendum if talks with the EU are reopened.
Shortly after the announcement of the new Greek proposal, German Chancellor Angela Merkel ruled out further negotiations until after Sunday’s poll.
The Eurogroup rejected the extension call, but in a sign that eurozone ministers have not given up on finding a solution, they said they would confer over Greece’s latest loan request and debt restructuring today at 11.30 hours Brussels time. It was unclear how much the talks could achieve.
Speaking after the telephone conference, Eurogroup president Jeroen Dijsselbloem said that the last minute request by Tsipras to extend Greece’s bailout programme had fallen on deaf ears.
“We’re beyond that point, it comes too late,” he told Reuters.
He said that as a member of the eurozone and European Union, Greece was welcome to request a new assistance programme, but it would come with strings attached.
“That is quite a procedure to go through,” he said. “In the meantime, the situation in Greece, the economy, the Greek banks, has deteriorated, unfortunately even more, so that’s a difficult path to consider.”
Dijsselbloem, who is also the Netherlands’ finance minister, said any new programme might impose tougher conditions than the previous one.
Now, Greece lost access to a €1.8 billion euro loan tranche, €10.9 billion euros for recapitalising banks and the profits of loans to the ECB (the ECB’s Securities Markets Programme (SMP), a total of 16.3 billion.
The flurry of diplomacy came as tens of thousands of people descended on Athens’ central Syntagma square over the past 24 hours in two different rallies – one to reject additional austerity measures, and the other to push for Greece to agree to the terms in order to keep the financial spigot open.
With its missed IMF payment, Greece is on a path out of the euro with unforeseeable consequences for the EU’s grand project to bind countries through a single currency and for the global economy.
On Tuesday, Fitch ratings agency cut its long-term rating on Greece to CC from CCC, saying the breakdown of negotiations had significantly increased the risk that Greece would not be able to meet its debt obligations in the next few months.
On Monday, Standard & Poor’s lowered its sovereign rating on the country and said the probability of Greece exiting the eurozone was now about 50%.
“What would happen if Greece came out of the euro? There would be a negative message that euro membership is reversible,” said Spanish Prime Minister Mariano Rajoy, who a week ago declared that he did not fear contagion from Greece.
The imposition of capital controls to prevent the banking system from collapsing has given Greeks a bitter foretaste of what could follow exit from the euro. The government began a week-long shutdown of the banks and the stock exchange on Monday.
Bank withdrawals are limited to €60 a day, and a crisis mentality has gripped the country, with people queing at petrol stations and stripping supermarket shelves bare.
In Athens, opposition leaders – echoing EU officials – hammered home that the choice facing Greeks in the referendum is whether to stay in the eurozone or return to the drachma, even though the EU has no legal way of forcing a member state to give up the single currency.
Former Greek Prime Minister Antonis Samaras, leader of the main opposition party, said a “No” vote would push the country out of the single currency and wipe out wages and pensions.
Opinion polls show a majority of Greeks favour holding on to the euro, but the referendum is shaping up to be a close call. It is also unclear if the Greek authorities have the means and the time to organise the poll in such a short time.