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It took longer than many people expected but it now appears likely that Greece will begin to default on its loan repayment obligations tomorrow (June 30).
This is the day that Greece is required to repay a loan of €1.5 billion to the International Monetary Fund (IMF). After failing to agree to the reforms required by its creditors for another extension of its existing repayment terms, the country must either pay up, which it can’t, or default. In anticipation of this default, the European Central Bank (ECB) has just cut off Greece’s access to further funds from its Emergency Liquidity Assistance (ELA) facility, which had pumped an estimated €1 billion into Greek banks since the start of this year and had basically kept Greece’s financial system afloat during that period.
In anticipation of the coming chaos, the Greek government has just told the banks to stay closed until July 7. In the meantime, they will hold a national referendum on July 5 to ask voters to decide whether to accept new bailout terms from its creditors and to agree to the additional austerity measures that will accompany them or to default and turn their backs on the euro zone.
After overplaying his hand, this was really the only choice Greece’s Prime Minister Tsipras had left. He mistakenly believed that the threat of a Greek default would keep Greece’s creditors at the negotiating table but that belief was based on an outdated reality. When Greece received its first bailout related to the current crisis in May 2010, much of the debt was held by non-Greek European banks and there was real danger that a Greek default would spread contagion to the many other vulnerable euro-zone countries, and in so doing, trigger a chain of events that might ultimately lead to the euro zone’s collapse.
But a lot has changed since then.