The Greek Debt Crisis – Your Questions Answered

On June 30, Greece defaulted on a €1.5 billion payment to the International Monetary Fund, raising concerns about a Greek exit from the nineteen-member Eurozone. Despite a flurry of new proposals from the Tsipras government, its creditors—the IMF, the European Central Bank (ECB), and the other Eurozone countries—have agreed to delay further talks until after the July 5 referendum, when Greeks will decide whether to accept or reject terms of the latest bailout offer.

The Global Business and Economics Program will be monitoring and analyzing the situation closely, and will regularly update this page.

What Happened in the Referendum, and What Does it Mean?

On July 5, more than 61 percent of Greeks voted in a national referendum to reject the terms of the creditors’ June 26 bailout offer, handing Prime Minister Alexis Tsipras a revitalized—if not impossible—mandate to push for an improved bailout package that both rejects many of the austerity measures that creditors see as necessary and keeps Greece in the Eurozone.

Despite his domestic political backing, Tsipras will likely find it harder to reach a bailout agreement with his country’s European creditors, who overwhelmingly condemned his decision to hold a snap referendum in the first place.

Since the bailout package that Greeks voted on July 5 is no longer on the table—having officially expired last week—negotiations will have to begin on a new proposal, which Tsipras is expected to submit July 9.

When will Capital Controls be Lifted?

In response to the ECB’s July 6 decision to maintain its emergency liquidity assistance (ELA) program at €89 billion, the Greek government extended capital controls and bank closures through July 10. In a press release, the ECB’s Governing Council also noted that it would tighten the terms on Greek collateral pledged against ELA.  

Given the massive scale of bank withdrawals across the country—tens of billions of euros have been removed from accounts in the past month alone—Greek authorities have had no choice but to adopt capital controls and close banks nationwide to prevent a full-scale run on the banks.

If the ECB does not raise the ceiling on its liquidity assistance program, Greek banks will likely remain closed well beyond July 10, and ATM withdrawals—now capped at €60 per day per account—may be further rationed.

What is the Status of Negotiations Between Greece and its Creditors?

  • On June 2, the IMF released a preliminary draft debt sustainability analysis for Greece, declaring that Greece’s debt is no longer sustainable. Although no further debt relief was envisioned under the November 2012 bailout framework, Greece’s lower-than-prescribed primary surpluses as well as weak reform effort have led to substantial new financing needs that the country now cannot address alone. To make the debt sustainable, the IMF insists that (1) the maturities of existing European loans be extended significantly and that (2) Europe offers Greece a new financing package.
  • Greek Finance Minister Yanis Varoufakis—known for his combative negotiating style—abruptly resigned July 6, explaining in a blog post that his resignation would help the Greek government negotiate more effectively with its creditors. Euclid Tsakalotos, the head of the Greek negotiating team, replaced him.
  • IMF Managing Director Christine Lagarde said in a press release July 6 that the Fund is monitoring the situation closely and “stands ready to assist Greece if requested to do so.”
  • Following the Eurozone summit meeting July 7, European leaders gave Greece until July 12 to reach a bailout deal with its international creditors. This will likely require Greece to accept many of the austerity measures that Greeks voted against in the July 5 referendum.
  • On July 8, Greece filed a one-page request to the Eurozone’s €500 billion emergency bailout fund—known as the European Stability Mechanism (ESM)—for a new three-year program, reiterating its commitment to implement tax and pension reforms in the near future, while hinting at the need for debt restructuring. Creditors are eagerly awaiting a follow-up proposal due July 9, which will outline the economic reforms Athens promises to take in exchange for new bailout funds.
  • Chancellor Angela Merkel of Germany—Greece’s largest creditor nation—has made clear that she would oppose lending additional money to Greece through the European Stability Mechanism or granting it any debt relief until Tsipras presents an economic reform proposal acceptable to his country’s international creditors.
  • Speaking at the Brookings Institution July 8, US Treasury Secretary Jacob J. Lew seemed to throw his weight behind calls for Greek debt relief, cautioning that Greece’s debts are not sustainable and have to be restructured.
  • On June 22, the Greek government submitted an eleven-page proposal to its European creditors based mainly on higher taxes—particularly on corporations—and social contributions.
  • In response, the IMF on June 24 submitted a counterproposal insisting on higher spending cuts through more ambitious pension reform. It included a long list of “prior actions” that Greece must agree to implement in order for the IMF to complete the sixth review of its financial assistance program.
  • On June 25, Eurozone finance ministers submitted a redrafted counterproposal that largely resembled the IMF document, but made some important concessions to Greece, including a plan to incorporate a three-tiered Value Added Tax (VAT) system.

  • In a June 27 move that surprised even his own government, Prime Minister Alexis Tsipras announced his intent to seek public approval for any bailout deal through a national referendum, slated for July 5. Eurozone finance ministers, however, refused to extend the EU aid program beyond its June 30 expiration date in order to accommodate the referendum, triggering a collapse of the weekend’s talks.

  • At his own press conference in Brussels following the weekend’s Eurogroup meeting, Greek Finance Minister Yanis Varoufakis said Greece would reject its creditors’ latest bailout proposal, which reflected the state of play of negotiations as of June 26.

  • In a June 28 press release, IMF Managing Director Christine Lagarde reiterated that Greece must address its debt sustainability needs, insinuating that the Eurozone must put up additional bailout funds. She said a “balanced approach” would need “appropriate structural and fiscal reforms” as well as “appropriate financing and debt sustainability measures.”

  • As of June 29, there had been little indication that Tsipras would reconsider the creditors’ final offer, despite personal pleas from EC President Jean-Claude Juncker.

  • In an unexpected move, Tsipras submitted a letter on June 30 to the Eurogroup of finance ministers requesting a two-year bailout from the €500 billion emergency fund—known as the European Stability Mechanism—with parallel debt restructuring.
  • After a ninety-minute conference call on June 30 among the Eurozone’s finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, acting as chief of the Eurogroup, formally rejected Tsipras’ plea for a fresh bailout program. German Chancellor Angela Merkel also announced her country would not resume bailout negotiations until after the Greek referendum on July 5.

  • Absent the disbursement of additional aid, Greece failed to make its €1.5 billion debt payment to the IMF, which was due at 6 p.m. Washington time on June 30. Shortly thereafter, the world body announced that Greece was officially in arrears and could not receive additional IMF financing until the arrears were cleared. Since the IMF is not a commercial lender, Greece is not technically in default; nevertheless, it is now considered more likely to renege on its debt obligations in the coming weeks.

  • In the late hours of June 30, Tsipras once again overturned the chess board with a new proposal—submitted to the heads of the EC, the IMF, and the ECB—requesting an extension of Greece’s now-expired bailout in addition to a new rescue program worth €29.1 billion. In his letter, Tsipras said he was willing to accept many of the terms of the June 26 bailout deal, on the condition that some additional compromises be made.

  • In response to Tsipras’ proposal, Merkel reiterated July 1 that negotiations will resume only after the Greek referendum, while German Finance Minister Wolfgang Schäuble dismissed the letter as “no basis” for serious talks. The letter was a topic of discussion during a July 1 meeting of the ECB’s Governing Council, which must decide whether to sever the line of credit that has kept Greek banks afloat throughout much of the crisis.

What is the Referendum About?

On June 28, the Greek Parliament voted 178-120 to hold a July 5 referendum on whether to accept or reject the terms of the latest bailout deal offered by the country’s creditors.

The offer, which makes some concessions to Greece on the value-added tax (VAT) but insists on tough reforms such as pension cuts—is largely in keeping with the status-quo austerity policies Tsipras was elected to repudiate. However, with polls showing that most Greeks prefer to reach an agreement to stay in the Eurozone, Tsipras felt the need to call a referendum in order to reaffirm his political mandate to reject the deal.

The Greek government has since been lobbying its people to vote “no” in the referendum, which it says is the only way for Greece to secure a better deal from its creditors.

What are the Referendum’s Possible Outcomes?

While polls show that just over half of Greeks support accepting the creditors’ terms, Tsipras still has several days before the July 5 vote to galvanize a popular anti-austerity sentiment among a critical mass of Greeks. Here are some possible outcomes on what may happen:

  • The “yes” vote wins, giving the Greek government a mandate to agree to the creditors’ proposal. Since that proposal expired June 30, a new round of negotiations will be needed to establish the new terms, and to assess the market impact of the crisis as well as the effects of the capital control regime. Rebuffed by his own people, Tsipras may:
    • Resign and hand over his responsibilities to a technical or “national unity” government until snap elections are called.
    • Stay in office, which will likely fail to bring his country’s creditors back to the negotiating table.
  • The “no” vote wins, prompting Greece to exit the Eurozone and create a new, though sharply devalued, national currency, sparking financial turmoil in the near term as the government attempts to redenominate everything from bank accounts to contracts. While Tsipras is more likely to remain in power under this scenario, his legitimacy may still be in question after having promised that Greece could stick with the euro even if the country defaults on its future debt obligations.

Why Capital Controls, and What Do They Mean?

Following a June 28 meeting of the Greek Financial Stability Council, Greece selected a two-pronged strategy of capital controls and an extended bank holiday—effective June 29—in order to curb the outflow of money from its already-depleted banking system.

The decision was virtually a given after the ECB refused to increase the limit on its Emergency Liquidity Assistance (ELA) to Greek banks—now frozen at €89 billion—in addition to the EC’s refusal to extend its aid program beyond June 30.

Given the massive scale of bank withdrawals across the country—on Saturday alone, Greeks removed around €1 billion from accounts—Greek authorities had no choice but to adopt capital controls and close banks nationwide to prevent a full-scale bank run.

Until July 6—a day after the referendum—ATM withdrawals will be limited to €60 per day per account, and banks will remain closed.

Image: Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel holding a joint press conference at the German Chancellery in Berlin. Photo: Flickr/Bundesregierung