Greece said it will close its banks on Monday after a wild weekend in which worried Greeks lined up at ATMs to withdraw their savings, and European banks said they would not extend the country’s economic bailout past Tuesday.
At stake over the next few days are two major things: the survival of Greece’s economy, which is on the edge of a meltdown if its bailout ends, and Greece’s presence in the European Union, which is pushing the country to accept more stringent financial policies if it wants to stay in the group.
The main questions are: Will Greece default on its debt, and if it does, will it be forced to leave the euro?
Here are the five things to know about the tense and complicated situation.
1. The problem is Greece’s refusal to let the European Union tell it what to do
Here is the impasse: Greece has been surviving on $274 billion through two bailouts since 2010. The money keeping Greece afloat has come from three international sources known as the „Troika“: the European Commission, the International Monetary Fund and the European Central Bank (ECB). That bailout is coming to an end, but there’s one more payment to Greece left.
The country has been negotiating for five months to get the final bailout payment of $8.1 billion, which it needs to survive. The European Commission requires Greece to make major cuts to its budget before it can get the final payment. Greece, in turn, doesn’t want to make the spending cuts, which it believes will hurt Greek retirees and weaken its social services.
The recent decisions of the Eurogroup & ECB have only one objective: to attempt to stifle the will of the Greek people. #Greece
— Alexis Tsipras (@tsipras_eu) June 28, 2015
They will not succeed. The very opposite will occur: the Greek people will stand firm with even greater willfulness. #Greece
— Alexis Tsipras (@tsipras_eu) June 28, 2015
Time and money are putting pressure on the negotiations: Time, because the bailout officially ends on Tuesday, June 30, and money because on the same day, Greece has to pay $1.8 billion on a loan it owes the IMF for a previous bailout. Greece is also broke, and doesn’t have any money to make the payment. Greek citizens are panicking and withdrawing money from ATMs. The country and its banks are currently surviving on emergency handouts from the ECB.
A sad spectacle in Athens pic.twitter.com/E3XMhDE4HV
— Stathis Kalyvas (@SKalyvas) June 28, 2015
The other, lesser negotiation is to extend Greece’s bailout for another four months. That one will likely pass, and isn’t relevant right now.
The problem is that both sides believe they are completely correct.
European Union finance ministers believe Greece is spending too much and taxing too little, and they don’t want other countries to keep bailing the country out. They also believe they have the right to dictate terms to Greece because the ECB has to step in with more money from European banks and taxpayers every time Greece struggles.
Greek politicians, in turn, dislike the strict conditions and the EU for telling them what to do with their economy, so they have rebelled against the request.
Greek politicians are willing to accept imposing a few more taxes, but do not want to cut public spending on pensions and social services. The current Greek government, led by Prime Minister Alex Tsipras, came to power by promising it would not cut government spending.
The EU, however, very much wants Greece to cut its spending. Its list of conditions, published on Sunday, include tax and pension reforms, reforming the labor market and setting a new minimum wage. The big reforms the EU wants are in taxes and pensions.
On taxes, the EU is asking Greece to create an internal revenue service; pass new legislation to crack down on income-tax cheats; and raise the corporate income tax rate to 28% from the current level of 26%. Greece would also have to require corporations to pay 100% of their income tax in advance. Farmers would get fewer tax breaks. Greece would have to increase its VAT, a tax on consumer goods, to 23% for restaurants and 13% for food, energy, hotels and basic sewage, with a 6% tax on pharmaceuticals.
On pensions, the EU wants Greece to stop people from retiring early, as 75% of its public-sector employees do. Europe wants Greece to raise the retirement age to 67 years old — the same as Germany’s — which would be a big change from Greece’s current retirement age of 61 years old.
The situation will come to a head on Tuesday, when Greece’s bailout officially ends.
2. The bailout in question is actually not that big, but Greece really is broke
Greece has to pay about $1.8 billion on Tuesday to the IMF, which lent it money for the last bailout. There’s a lot of pressure here, since no country has ever defaulted on a loan to the IMF.
For Greece, this is a fortune. The country has very low cash reserves. Last month, it managed to pay back the IMF an $837 million loan only by raiding a special national account . The IMF had to give the country special permission.
Greece could easily pay the IMF loan with the last, $8.1 billion chunk of its bailout money, which is also, in part from the IMF. (Yes, Greece is paying back the IMF with the IMF’s own money). But then Greece would have to cut its budget, which would be politically unpopular.
The choice before Greece is: insolvency or political unrest.
To delay the inevitable financial disaster, Greece has put its financial system on hiatus. Its banks will close Monday — and possibly for the next week — while withdrawals from ATMs will be capped. The Athens Stock Exchange will also close on Monday.
This is just the first in a litany of Greek financial woes this summer. Greece has a lot more debt due this summer. Greece owes, in total, about 242 billion euros. Reuters calculated. That includes the IMF and ECB, as well as countries including Germany, France, Italy and Spain.
3. How Greece got into this mess (this time)
This is far from Greece’s first time at the bailout rodeo. Greece’s debt first started raising alarms in 2010, when Europe started to fall into a crisis, and Greece received its first bailout then from the IMF. The bad news continued into 2011, when people started talking about an orderly default, to 2012, when Greece received its second bailout to the tune of 130 billion euros. With the bailouts came austerity — cuts to pensions and public spending that caused riots and protests as Greeks rebelled against the strict terms.
In 2015, Greece elected new leaders, including Alex Tsipras, who campaigned with the promise of ending „the vicious cycle of austerity.“
What we’re talking about now is Greece’s third bailout in five years, so it’s safe to assume everyone involved is completely sick of each other. The clash has complicated the negotiations, as European finance ministers froze out the brash Greek finance minister, Yanis Varoufakis, after hurling abuse at him during tense negotiations.
The bad blood has become worse over the past two days, during which the disdain between Greece and the European Union has spiraled into financial chaos as the next bailout hangs in the balance.
On June 26, after five solid months of negotiation, Greece unilaterally cut off talks with the European Union. On Saturday, Greece inflamed its enemies when its prime minister said that, instead of negotiating directly with the European Union about the bailout conditions, he would ask for a democratic vote of the Greek people through a referendum on Sunday, July 5th.
Democracy deserved a boost in euro-related matters. We just delivered it. Let the people decide. (Funny how radical this concept sounds!)
— Yanis Varoufakis (@yanisvaroufakis) June 26, 2015
At the same time, Greece also (rather cheekily) asked the European Union to extend the terms of its bailout from June 30 until July 5th, saying that Europe would face „extended damage to its credibility“ if it didn’t keep bailing out Greece. Without much debate, 18 European finance ministers refused.
Now, without an extended credit lifeline from Europe, Greece is facing financial meltdown as well as civil and political unrest from the riots and protests that are sure to follow. The risk is that the Greek people could vote for default — but more importantly, democratic votes are unpredictable and the uncertainty has led to political and economic chaos.
The bigger worry is that if Greece goes down, the European Union — which is, after all, an integrated economy — could suffer with it.
4. Greece really does need that bailout
If Greece does not arrange a new bailout, it will be in default. There’s a lot of shame in that, naturally, because defaults in countries, as in people, show that they can’t get their act together.
There are also financial and political consequences to default, including the risk of riots and civil unrest.
Countries generally try not to default on the debt they owe, because most world economies run on loans, particularly from investors and banks outside their borders. As with consumer foreclosures or bankruptcies, a default shows a country to be untrustworthy in its intention to pay back its debt, which, in turn, makes it hard to borrow more money. At the least, countries that default have to pay very high interest rates to borrow again — and since they default in the first place because they’re broke, they can’t afford high interest rates, either.
As an exception, Argentina intentionally defaulted on some its debt this year, resulting in no extreme consequences except high inflation and shortages of some consumer products, including tampons.
Greece may not get away so easily, however, because it is not a standalone economy, but is instead integrated into the 19-member European Union. If Greece leaves the EU — a „Grexit“ — then it will undermine the entire purpose of the economic union, which is to see its members through all troubles.
“Greece is and stays a member of the eurozone,” German Finance Minister Wolfgang Schäuble said this week. That statement will be tested over the next week.
5. It’s getting uglier each day as people rush to get their savings from ATMs
Greeks have been lining up at ATMs all weekend to pull out their money. Greece’s banks are the key to its financial stability. The more that Greek citizens withdraw their money from banks, the more likely the banks are to fail and the more likely the country is to face an economic meltdown.
The situation created a panic that grew so extreme that Germany’s foreign ministry advised Germans to carry cash if they are traveling to Greece, in order to avoid shortages at automatic teller machines. Top Greek officials told citizens to remain calm and avoid withdrawing all of their savings.
Until now, the ECB has been saving Greece by pouring in more money to its banks every time Greek people make huge withdrawals. That is called „emergency liquidity assistance,“ or the ELA.
Importantly, the ECB also said it will not increase its aid to Greek banks to make up for the money lost as citizens keep pulling out their money.
Greece’s banks are already surviving on a financial lifeline from the country’s central bank — an unusual move that the European Union allowed to keep the country from an economic crash while the fate of its bailout is being decided.
To understand how extreme that is, consider the equivalent in the U.S., which would mean that Bank of America and Wells Fargo would survive not by doing business, but only on loans from the Federal Reserve. (That, by the way, has never happened).
If Greece leaves the European Union, many people expect it would be an economic disaster as the struggling country would have to find a way to create a new currency that is sure to be nearly worthless and financial transactions would likely come to a standstill.
While the politics are being decided, the emergency is the ATM withdrawals. In the short term, Greece could, as one option, cap withdrawals from the banks.
The next week is absolutely crucial for Greece’s health
The next week is likely to be one of the most intense in Greek history, not counting the Peloponnesian War between Athens and Sparta in 431 BCE.
On Monday, Greece will close its banks to prevent people from pulling their money out. That will also keep the country’s financial system afloat until Tuesday, which is the deadline for the end of the bailout.
But the wider global financial system could face a shock as Greece’s fate is undecided.
Greece fully expects the ECB’s ELA — remember, that is the emergency liquidity — to keep the country’s bank’s afloat.
Alternate Greek Finance Minister Nadia Valavani told private Mega television on Sunday „we are expecting the funding of Greek banks to continue normally via the ELA after Tuesday.“
Valavani said the country’s banks could see „business as usual“ next week if they receive the emergency support „so long as there is calm“ and Greeks don’t attempt to withdraw all their savings.
If Greece makes it to Sunday, July 5th on the ELA, the referendum in front of the Greek people will decide what happens next.
— Alexis Tsipras (@tsipras_eu) June 28, 2015
— Alexis Tsipras (@tsipras_eu) June 27, 2015