Greece defaults

By Matthew Karnetschnig

After five years of negotiations and arguments and chaos, the clock finally strikes midnight for Greece.

After five years of negotiations and arguments and chaos, the clock finally strikes midnight for Greece.

By Matthew Karnitschnig

30/6/15, 11:59 PM CET

Updated 1/7/15, 10:35 AM CET

Greece’s five-year struggle to avoid default and preserve its membership in Europe’s single currency ended in shambles at the stroke of midnight, as the country missed a key payment to the International Monetary Fund.
The default caps months of harried talks with creditors to redefine the parameters of a rescue that Athens argued had placed unbearable strain on a populace in the throes of an economic depression.

The often vicious debate between the upstart leftist government in Athens and the EU establishment has resonated far beyond Greece, raising uncomfortable questions for the continent’s leadership over their commitment to Europe’s core principles of social cohesion and solidarity. Those debates are likely to intensify, as the EU confronts the UK’s desire to renegotiate the terms of its membership and struggles to find common ground on other fundamental questions from security to migration.
Whoever is to blame for the collapse of the Greek talks — a creditor group that includes the IMF and other eurozone governments — or Greece itself, the default marks the undisputed failure of the country’s €245 billion rescue, the largest the world has ever seen.
Greece is now firmly on a path to leave the eurozone, and possibly the European Union. While markets have so far weathered the immediate fallout, a Greek exit from the euro would show that membership is not irreversible, a reality that will have long-term implications for the currency’s stability.

Greece is now firmly on a path to leave the eurozone, and possibly the European Union.

Among those tainted by the failure is Europe’s most powerful leader, Angela Merkel. The German chancellor was one of the rescue’s key architects and its collapse raises doubts about her legacy. More immediately, she will have to explain to German voters why the tens of billions of euros they pledged to the bailout have evaporated.
IMF Managing Director Christine Lagarde issued an official notice of default just after midnight in a notice to the fund’s executive board. IMF Director of Communications Gerry Rice said in a statement that the “IMF received a request today from the Greek authorities for an extension of Greece’s repayment obligation that fell due today, which will go to the IMF’s executive board in due course.”
For Greeks, the immediate impact of the default might be limited, but the near-term consequences will be profound. The government was forced over the weekend to curb access to bank deposits, pending a Sunday referendum that many see as a vote on trying to remain in the euro. There was some doubt late Tuesday over whether the referendum would even be held. The ostensible purpose was to endorse a deal no longer on the table and even members of Prime Minister Alexis Tsipras’ Syriza movement, including his deputy prime minister, questioned the point of holding the vote.
If it is held, a ‘no’ vote would all but bury Greeks hopes to remain in the currency because the rest of the eurozone would view it as a rejection of the principles that govern membership.
Even if Greeks vote ‘yes,’ the default could make it difficult for them to stay. In addition to the default, Greece also lost any hope of tapping further funds from its bailout at midnight. That means that the government will have to negotiate a new bailout in the coming weeks to pay off other debts coming due.
Without fresh aid and a stabilization of Greece’s banking system, the government will also have difficulty paying pensions and government salaries in the coming weeks. Without access to cash, it may have to resort to issuing IOUs or begin printing its own currency.
Unless Greece can secure new funds in the coming weeks, the ECB will have no choice but to cut off its liquidity support for the banks, which would trigger their collapse. The ECB has already limited its support for the banks, a decision that forced Athens to close banks until next week to forestall a run on deposits.
As Greece approached the point of no return on Tuesday, Europe’s leaders engaged in a flurry of last-minute diplomacy.
In one of the most dramatic days in Greece’s seemingly  endless struggle to overcome its debt crisis, leaders in Athens and Brussels retreated from the recriminations of recent days to exchange blueprints to break the impasse.
But in the end, their proposed remedies remained far apart, raising questions about whether the frantic wrangling was more about assigning blame for the failure than finding compromise.
The day started with a fresh proposal from European Commission President Jean-Claude Juncker, delivered to Athens late Monday.