Time is running out as Greece's bailout program expires this month, igniting fears of a possible Greek exit from the eurozone. Athens is also closing in on a June 5 deadline for a debt payment of 300 million euros ($327 million). The troubled country risks default if it doesn't pay the International Monetary Fund a total of 1.6 billion euros ($1.8 billion) by the end of June.
Greece threatened to miss its loan repayment to the IMF on Wednesday, just hours before European Union creditors were expected to present an ultimatum offering Athens funds in return for economic reform, Reuters reported.
As Greece slowly depletes its capacity to borrow to repay its loans, it faces deadlines for negotiations with its main creditors. Here are four things to know about Greece’s predicament.
1. How did Greece get to this point? Greece and eurozone finance ministers reached a deal in February to extend the country's bailout program for four months, but under the terms of the agreement, Greece was required to submit reform proposals to those ministers. Prime Minister Alexis Tsipras submitted a proposal to creditors Monday in an attempt to secure a deal, but no agreement emerged.
Greece’s creditors gathered in Berlin this week, and the European Commission, the European Central Bank and the IMF agreed on a separate, proposed deal for Greece, a senior EU official said in a Reuters report. However, the proposal still needs to be accepted by Greece.
Tsipras was in Brussels Wednesday to meet with senior European officials.
2. Why is Greece renegotiating? Greece wants to renegotiate the terms of its $270 billion bailout program after the far-left Syriza party won elections in January. Before the national elections, Syriza, led by Tsipras, staged a revolt against the budget cuts and other austerity measures under the bailout arranged by the commission, the ECB and the IMF, known as “the troika.”
Greece's previous conservative government had agreed to those bailout terms, but the new government argues the austerity measures imposed by the troika hurt the country’s economy by forcing public spending cuts, public sector pay cuts and gas hikes.
“So far, all of the requirements on Greece have led to further impoverishment in the country,” said Gary Burtless, senior fellow for the Brookings Institution. “Structural reforms could boost Greece’s rate of growth, but its repayments have caused fiscal stringency, which has actually weakened its economy.”
3. Could Greece leave the eurozone? As Greece's debt dealings escalate once again, many are pondering what might happen if Greece were to part ways with the rest of Europe. Greece's debtors have a valuable bargaining chip because a withdrawal from the eurozone would be much harsher on Greek citizens than on the rest of Europe.
“It’s a one-sided negotiation at this stage,” said Burtless. “The threat of Greece leaving the euro might undermine confidence in the currency, but that’s the only strong card Greece still has left in its hand.”
The only negotiating power Greece has left would be to withdraw from the euro, making it more difficult for Europe to sell the debt of other heavily indebted countries, such as Spain, Portugal and Italy, in international markets.
A Greek exit might cause a further unwinding of the euro, but experts don’t think that’s much of a threat at this stage. “There’s a real risk, but other European countries may feel that those risks are manageable," Burtless said.
Economists expect pulling out of the euro would almost certainly throw Greece --at least temporarily-- back into a severe recession. However, there are some advantages for Greece if it leaves the eurozone. An exit would allow the country the freedom to devalue a new currency to make foreign trade more attractive, which would help its manufacturing, service and tourism sectors.
“After a very bad period, the Greek economy would probably revive much faster if it had its own low, devalued currency, but the best outcome is if they reach an agreement with eurozone countries because it would give Greece’s economy room to grow and recover,” Burtless said.
4. What’s likely to happen? Greece is likely to make a long-term agreement with creditors that would stipulate the country would pursue specific reforms, and in exchange its creditors would reduce the amount of debt and permit Greece a longer time span to repay.