Four consequences of Greece’s D-Day

As of Wednesday Greece is a country in default without a bailout program, and the impact will be huge on its economy.

On Tuesday Athens day failed to pay obligations to the International Monetary Fund (1.6 billion euros) and the Bank of Greece (472 million euros), meaning twin defaults on its debts to the Fund and the central bank, even if the IMF does not describe it as a default straight away.

The consequences of the default will grow due to the absence of a program that would have safeguarded the smooth operation of the credit system via European Central Bank liquidity. The combination of the twin defaults with the end of the bailout program presents the government with a series of problems.

First, the non-payment of the IMF tranche will have an immediate impact on the loans issued to Greece by the European Financial Stability Facility (EFSF), which amount to 141.9 billion euros. The IMF loans are connected to those from the EFSF through cross-default clauses, meaning that the eurozone now has the right to demand the immediate payment of the 141.9 billion euros.

Second, forfeiting the IMF payment and mainly that to the BoG (i.e. to the Eurosystem) will be terrible for the country in terms of the decisions of the European Central Bank, whose governing council is set to convene on Wednesday.

The country is not solvent anymore, and neither are its banks, therefore the ECB can no longer support banks that are insolvent, and might even demand the payment of all 89 billion euros it has lent Greek banks through the emergency liquidity assistance (ELA) mechanism.

Third, Greece is missing out on the bailout funds that it would have collected in the context of the second bailout program, totaling 16.3 billion euros – i.e. the 10.9 billion euros of unused bank bailout funds, the 1.8 billion euros from the last tranche of the program, and 3.6 billion euros from the 2014 and 2015 profits of the Eurosystem from holding Greek bonds.

And fourth, if Greece had harbored any hopes about a gradual return to the money markets, that definitely won’t happen now. Both the default and the absence of a bailout program are factors that drive away investors.