European and Greek officials are currently holding an emergency summit which within the next 24 hour could decide whether or not Greece would get an emergency aid packet. On Sunday, Greek PM Alexis Tsipras set out new proposals to try to prevent a default on a €1.6bn IMF loan. The failure to reach a deal so far has caused a major delay in the release of €7.2bn of a much needed bailout.
Spending on pensioners is currently 16% of Greek GDP. International creditor would like this cut by 1% of GDP claiming that they are merely targeting early retirements rather then lower income pensioners. However, the Greeks have so far ruled out any cuts to pension payments or any other public sector payments – pointing out that two-thirds of pensioners are either below or near the poverty line.
Budget Surplus Targets
According to EU officials, Greece has agreed to budget surplus targets of 1% of GDP this year, followed by 2% in 2016 and 3.5% by 2018. The Greeks have simply stated they they will not agree to anything until a final deal is agreed on.
Expansion on VAT
In order to open up a more diverse set of taxations, creditors would like Greece to have a more diverse VAT base. Greece says it will never increase VAT on medicines or electricity bills.
Why Does Greece Need a Bailout?
Currently, Greece has debts of €6.74bn – including €5.2bn short term bills and €1.5bn owed to the IMF. Additionally, the Greek government needs to somehow find another €2.2bn by the end of June in order to fund public sector salaries, pensions and social security payments. Greece has certainly not got sufficient cash in order to pay her debts and finance the public sector jobs and pensioners.
For Syriza, the radical-left governing party in Greece, it would be an unforgivable act to pay international creditors over supporting 2.6 million Greeks whom are reliant on pension funding and approximately 600,000 public sector workers who need to support their families. Therefore, without at least part of the final €7.2bn slice of its giant EU-IMF bailout, Greece would almost certainly default on its debts.
Greece’s last cash instalment was nearly a year ago which means the Greeks are completely reliant on a new injection. Consequently, the final €7.2bn instalment from its two EU-IMF bailouts, worth €240bn in total, now seems to be more imperative then ever before.
What Will Happen if Greece Cannot Repay her Loans?
The European Central Bank (ECB) is now effectively keeping the Greek banks and government afloat. If the Greek government defaults on its loans, it thus risks the prospect off cutting off their liquidity flow and its lifeline for economic survival.
IMF chief, Christine Lagarde, has already informed Greece that if they fail to pay the IMF by the 30th June, there will be no interim or easing off period for the country to find money and it will be in default.
Furthermore, there is very little scope for the European Central Bank (ECB) to remain supporting the Greek banking system if the Greek Central Bank fails to pay their July 2oth payment to the ECB.
Without this fundamental flow of liquidity, Greece would most certainly default, which would most likely force Greece out of the Euro. Leaving the Euro would most likely create an economic meltdown and complete financial chaos and uncertainty within Greece. Within the past week, tens of billions of euros have been withdrawn form private and business accounts and deposits would leave even faster. The Greek government would then have to attempt to implement some form of capital control measures, such as limiting withdrawals, in order to help their financial system to survive. As a result, the Greeks want to stay in the single current but a forced default would without a doubt expel them from the single currency.
If Greece leaves the Euro then it would further weaken the currency which is already artificially undervalued due to the incredible amount of Euros printed off by the ECB due to its aggressive quantitative easing policies over the past year..