Greece has become the first developed nation to default on a loan repayment to the International Monetary Fund.

Greek Prime Minister admits his country cannot pay the outstanding interest repayments on Greece’s crushing debts. The government had until midnight to pay $2.33 billion (1.6 billion euro) to the International Monetary Fund.

Greece was offered a loan to pay off this loan. But the second loan would require painful and protracted austerity measures, something which Greeks, and their government, firmly reject.

Prime Minister Tsipras has scheduled a referendum, allowing Greeks to decide whether or not to accept the package.

Upon declaration of the referendum Greek people took to the streets generating support against a bailout package they believe will impoverish their country for generations.

Should the package be defeated in the referendum Greece will be the first country ever to leave the Eurozone. It is unprecedented; so what are the likely outcomes?

On the negative side:

  • Greece would likely need to repay its bills with IOUs. These would most likely become a parallel currency. In 2009 a bankrupt state of California did just this and emerged the stronger for it.
  • Greece would revert back to its old currency the drachma. How this exchange rate would be determined for the new currency is unclear. What is certain, however, is that the new currency would be worth much less than the euro. And this is why Greeks have been withdrawing as much in euros as they possibly can.
  • Crime would rise. Houses stuffed full of high-value euros will make a tempting target for robbers.
  • Barter systems will begin (and have begun) popping up all around the country.
  • There is a big risk of inflation. Petrol, as an example, would become very expensive as compared to the new currency. Therefore the cost of all transport would rise. The cost of the products being transported would rise to accommodate this. And so wages would have to rise to keep up with a ballooning cost of living.

 

On the positive side:

  • The low exchange rate would boost the country’s economy. Greece would suddenly become a low-cost country attracting investment and tourism.
  • Greece would walk away from its debt and be free to rebuild its economy. “As far as I can tell, said Dr Mark Melatos, senior lecturer in economics at the University of Sydney, “the debt can’t be repaid, at least not in full. So they may as well default as you would in a normal bankruptcy.

“Sure it will cause a lot of pain in the short term, but the alternative would have required other euro countries to give even more money to Greece in perpetuity.”

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