The situation in Greece is manifestly untenable. As things currently stand, Greece will not be able to pay her scheduled payment of €1.6 billion to the IMF tomorrow, at which time the IMF will cut off all further funding, and Greece will fiscally (continue to) suffocate under its unsupportable foreign debt. As you may remember, Greece successfully made its €750 million May IMF payment…with IMF holdings that had been earmarked for Greece.
After utilizing the brilliant stratagem of utilizing IMF funds to pay the IMF, Greece now faces a situation where brinkmanship no longer has any place; Greece has arrived at the brink itself. The June debt payment to the IMF, double the amount of the May payment, was supposed to be four separate payments throughout the month. It was restructured as a bundle due June 30th, and Greece is not going to be able to pay it.
Still, there is contention regarding possibility of a Greek default, and further if it will leave the Eurozone if it defaults. Many prominent economists posit that the EU will not let Greece leave, because a Grexit would open the door to other countries such as Spain and Italy seeking to exit. Twitter has wholeheartedly embraced the Country+Exit contraction, from Grexit to Brexit to Prexit, as Great Britain will be having an EU membership referendum by 2017 and news broke over the weekend that Puerto Rico is close to default without a restructuring program.
Public opinion has finally shifted toward Greece defaulting and leaving the Eurozone as an eminent probability. Greek banks are shut down for this entire week and withdrawals capped at €60 per day in anticipation of ever-increasing bank runs. The withdrawals have already reached €1 billion per day as private citizens’ panic and seek to withdraw their Euros before they are changed into heavily devalued drachma, summarily wiping out their savings. Mohamed El-Erian, former CEO at Pimco, put the probability that Greece will be forced to soon leave the Eurozone at 85%.
Through this ongoing crisis, the Finance Minister of Greece, Yanis Varoufakis, has repeatedly affirmed that Greece would reach an agreement with her creditors to extend their bailouts. While he has coolly played his brinkmanship game in his negotiations with the Troika (ECB, EU, IMF), Prime Minister Tsipras has become increasingly volatile, saying they bear “criminal responsibility” and austerity measures are “to humiliate an entire people.” It appears Tsipras is less proficient at play-acting than Varoufakis.
So the real question is will Greece default and leave the Eurozone? Yannis Varoufakis already answered that question in 2012 when he was the professor of economics at the University of Athens. In the linked article entitled “Greek Default does NOT Equal Greek Exit”, Varoufakis insisted that, “Greece must default within the eurozone!” Varoufakis proposed that Greece could default on her debts, but continue to use the Euro and be a member of the EU, even though he also said, “By now, reasonable people realize that the Greek Bailouts do not work.” So how was Greece to magically default on €300 billion in debt but stay in the Euro? He only defines one pre-requisite for this all to work perfectly:
“All that is needed is that the ECB continues to provide liquidity to the Greek banks.”
Sources in Greek banks themselves have told Greek newspapers that as much as €25 billion has left Greek banks in 2015. The ECB recently reiterated that they follow rules, and by those rules have will have to freeze the ELA, ELA here meaning “the funds that continue to provide liquidity to Greek banks.” By the estimation of Greece’s own Finance Minister, Greece’s only option is to default and exit the Eurozone.
AUTHOR UPDATE: Varoufakis has affirmed that Greece will miss her repayment to the IMF today (June 30). The S&P has also cut the credit rating of four major Greek banks to SD (Selective Default). It is very likely the ECB cuts the emergency loans within the next week.