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Greece is on the verge of collapse.
There isn’t enough cash in the system. Banks are closed. ATM machines are set to dispense just 60 euros per day per person. And by the end of the week, there may be no cash available.
It sounds like a dire situation … and it certainly is.
Late last month, Greece failed to pay the International Monetary Fund a debt payment of 1.55 billion euros. It was the largest default in the IMF’s history.
Now Greece is facing an even bigger challenge. On July 20, the country owes the European Central Bank 3.5 billion euros.
Unlike the default with the IMF, there will be consequences if Greece can’t iron out a deal with its lenders and partners in the European Union. Failure to do so could result in expulsion from the EU.
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It’s clear that Greece simply doesn’t have the cash to pay back its debts. And that means the country must renegotiate a deal to avoid default. The problem is that Greek leaders have been unwilling to come to the table with a realistic and workable solution.
Other EU countries – led by France and Germany – are demanding that Greece raise taxes and cut benefits. Only with these changes will they be willing to bail out the country for the third time.
Meanwhile, the Greeks are unwilling to accept these austerity measures. In a Sunday referendum, 61% of the people voted against austerity measures. Put another way, this “no” vote can be viewed as a vote to leave the EU. Because without additional austerity measures, the EU isn’t going to let Greece off the hook.
It’s a classic showdown of wills. The EU countries with stronger economies are tired of bailing out Greece. Meanwhile, the Greeks know that keeping the EU together is a top priority.
On Tuesday, French President François Hollande showed support for Greece staying in the EU. That’s a feeling widely held by other EU member countries, even it isn’t shared by their constituents.
The ECB plans to pull support from Greece’s banking sector if there isn’t a deal by Monday. And that’s creating real pressure for a solution.
Who will cave? Time will tell.
Beyond the country’s debt woes, the economy is in shambles. In the last five years, Greece’s gross domestic product has shrunk by 25%. Meanwhile, unemployment is at 25%. And among young people that rate is around 50%.
Greece may seem to be a world away. But it’s already impacting investors here in the U.S.
Since late June, the S&P 500 is down 4%. The primary reason behind this move is the Greek debt crisis and its impact on the eurozone.
It seems quite plausible that Greece will leave the EU, and the market is pricing that discount into stock prices.
But there are many questions to consider. Who will support Greece if the country isn’t part of the EU? What precedent does this set for the future stability of the eurozone? Will the country seek support from communist countries including China and Russia?
The situation today isn’t nearly as bad as a couple years ago. Back then Greece, Italy Portugal and Spain were all suffering and were at risk of leaving the EU. Today, it’s only Greece that’s still suffering greatly.
The long-term consequences of a Greek exit are largely unknown. It’s hard to understand what this means both near and long term.
In the near term, it would certainly be best if the Greeks and their European lenders can come to a suitable compromise. That would provide stability for global stock market prices.
But in the long term, another bailout won’t fix Greece’s ailing economy. Unless the country can begin growing its GDP and getting its unemployment under control, the Greeks will continue to be largely unsatisfied with their prime minister and participation in the EU.
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