What happens to India, EU and the world if Greece doesn't pay up?

Greece faces a deadline to pay off the International Monetary Fund (IMF) on June 30. For the first tranche of payment to meet the deadline, it must accept a list of reforms and budget cuts from the troika of IMF, European Central Bank and the European Commission. Calling the lenders' offer a “humiliation of the entire Greek people”, and standing true to its leftist stance, Greece Prime Minister Alexis Tsipras has rejected the offer put forth by the troika, and has now called for a referendum on July 5. A vote has been duly approved by the government since. On the other hand, other European Union member states, taken aback by the sudden referendum plan, have refused extend the bailout program expiry date beyond June 30, thereby putting a bigger question mark on the fate of Greece in the single currency unit. 

"However, with a near 25% decline in GDP and a 25% unemployment rate, Greece’s ability to repay its debt is far from reality," a report by Edelweiss on 'Greece and lessons from history' dated June 25 says. Failing to meet the deadline, Greece will receive a cable from Washington and IMF, stressing on immediate payment and the "seriousness of the failure to meet obligations". Soon after, the European Bailout Fund can also declare a default and other creditors can follow and ask for immediate repayment of the loans, the report adds.  

The European Financial Stability Fund (EFSF), the European Central Bank (ECB) and other European Union central banks collectively hold 57% of the total Greek debt. Other Euro area member governments hold 17% of the total debt, and the IMF, whose first installment needs to be paid off, only holds 7% of the total Greek debt. 

This pie chart from the same Edelweiss report breaks down Greece's 312.7 billion euro debt.

June 30 is just the beginning of the long debt repayment timeline for Greece. The date is only the deadline to pay the first installment of IMF's total loan to the country. The end is nowhere in sight, literally. Here's a detailed graphic by Wall Street Journal of what Greece owes to whom, and when.

Also read: Greek debt drama: How much does Greece owe to international creditors?

If the Greek parliament votes against the bailout program, hence rejecting the reforms proposed by them to release the first set of funds, and doesn't pay up, it will have adverse effects not only on the country, but on several major entities around the world. Explored here are some of the possible side effects of Greece defaulting: 

On the IMF

To begin with, a failure to pay back IMF’s debt is not really a default. Technically, it can only be called a default if a country fails to repay its bond holders — not the IMF, which is but an organisation, and hence not a stakeholder of the country. Failure to meet the deadline on June 30 will be called ‘arrears’, according to IMF’s definition. Once in the arrears, the IMF, in accordance with its arrears procedure, will send more people to Greece to help negotiate a program to clear its arrears. This, again, will be in the form of policy change and structural reforms to help the economy, and for IMF to get its money back. Which means, austerity measures, which is against Tsipras' and his leftist party, Syriza’s method of getting out of the debt.

Many experts believe that Greece is not completely to blame for the insurmountable debt it has garnered. Many maintain that IMF should have let the country default in 2010 and let it pick up the pieces, which would have been much smaller than what they will be today if the country doesn’t manage to pay up on June 30. If it happens, this will be the first time that an advanced economy, a European economy nonetheless, gets added to the IMF’s list of arrears. It will also be the biggest arrears in the Fund’s 70 years of existence since 1945. Apart from its effect on Greece, which is explored later in the article, it will also have an adverse effect on the IMF’s credibility. A Bloomberg View article explains that IMF's "preferred creditor status" -- although not a legally recognised rank, but an accepted rating to recognise countries that need funds in the absence of willing creditors -- will come under scrutiny. So will be the firm's longstanding rule of always having a European as the head of the organisation. The IMF went against its policy of not lending to advanced European economies, for Greece — the last instance was before 1970 for UK. While it will cut off Greece’s international funding in a few days’ time, this non-repayment will also impact the IMF’s reputation of evaluating the credit worthiness of countries, and it will hamper the Fund's chances of lending to other economies in dire need in the near future. 

On Greece

An immediate effect will be on the banking system. When an economy collapses and the government fails to secure a bailout, citizens lose confidence and pull out whatever money is stashed away in their accounts. Greece has already seen withdrawals of over $4 billion recently in about two weeks, and the country’s domestic deposits are at its lowest level in a decade. So much so that European banks have already loaned as much as an additional 115 billion euros to the country only to help keep the banks afloat. The government can be expected to go as far as shutting the banks or ATMs to avoid more withdrawals or levy a hefty fee on withdrawals. On Saturday, when Prime Minister Tsipras called for a referendum on the bailout plan, people were immediately seen lining up outside ATMs. A deputy minister soon went on air after the PM's announcement to assure the people that banks would open as normal on Monday, and that there were no plans to impose capital controls yet.

As explained earlier, failure to repay IMF’s debt isn’t a default. However, being in the IMF’s arrears is also a big deal. Any more measures to fund the Greece's debt will soon be stopped. Any foreign investment made in the country will be withdrawn and due to a massive dip in confidence, Greece can bid good bye to any foreign investment for a long time. Syriza will have to cut government spending and pension funds, against its ideologies, and food and services’ prices will rise, causing a civil uproar and even rioting. The country’s GDP will shrink, and other countries will stop imports fearing non-payment. A government will have yet again failed the Greeks, and a way out then will not only be austere but bleak.

Also Read: Eurozone: What is the road ahead for Greece?

On the Eurozone

The idea of Eurozone stands to die. The Eurozone was formed on the idea that several countries can come together with a single currency and function, aided by fringe benefits like easy borrowing and lending processes (because the currency is the same).. This idea, in essence, will fail. In case of a Greek default, other Eurozone countries will not be spared of the cascading effect. It will be the first time that a European country will fail to pay off a debt to the International Monetary Fund, which means that investors and lenders’ confidence in other indebted Eurozone countries will also turn weak, and they will scramble to get their payments back immediately, thus putting pressure on other economies and their stock markets. This will also mean that they may stand to lose out on international and private funding too. 

On the European Union

When Syriza came into power, Tsipras biggest ace card to garner the EU’s attention was to threaten an exit from the European Union. Today popularly known as a Grexit, it will mean tarnishing the longstanding fact that a European Union membership is irrevocable. While there was widespread fear and worry about the Grexit early this year, it has since caught less and less eyes as other member countries like Spain, France and Italy, have shown improving economic indicators like Purchasing Manufacturers Index PMI) and GDP in the first two quarters of 2015, despite the European crisis. Greece, in the same period, has struggled to portray any growth at all. This has worked to erase the fears of other member countries meeting with the same fate. Sure, there are some who worry about Greece exiting and eventually growing, aided by a flexible currency, but this remains a big “ IF”, and fears about it are far and few. Germany, despite having the largest exposure to Greek debt has shown no qualms to a Grexit, if it were to happen. 

On the Euro

The movement of the Euro post the June 30 deadline stands to send rippling effects across the world. It is always difficult to predict an impact on currency, where there are many factors to consider even in an economically stable environment. The obvious effect is that the Euro will tumble if Greece is unable to secure a bailout. This means the dollar will gain strength, and the basket of currencies linked to the dollar will all bear the brunt of the dollar’s strength. Which simply means that importers will rejoice and exporters will scurry for help. Inversely, if the market factors in the effects and deems the Greek tragedy and an exit beneficial for the rest of the Union, then the Euro will strengthen. This means the dollar will weaken and as an effect, export-oriented countries like Japan will do extremely well, while India, which is a major importer of defense equipment from the US will have to eat into its defense budget or cut spending. Weak dollar will also eat into US’ import bill and make things more expensive back home.  

On the Europeans

Over 300 billion euros of taxpayer money is at stake in Greece, this Bloomberg view article says. Since the Eurozone crisis started in 2010, European banks have been providing money to the country so that it can pay off private lenders. The country’s biggest private lenders are the French and German banks. Due to this aid, compared to 2010, their exposure to Greece is down significantly today. But this aid has been at the cost of Europe's taxpayers' money. In order to help Greece in paying off its debt to other lenders, European banks have exposed themselves to a debt of about 313 billion euros notwithstanding an additional 115 billion euros, as mentioned before, that it gave Greece to substitute the money being pulled out of the country. This money was aggregated from different entities in Europe which are eventually backed by shareholders and investors. This means, if Greece doesn't repay its debt or eventually slides out of the single currency zone, then millions of taxpayers will never see their money again. This stands to adversely affect investment confidence and sentiment in those countries in the future. 

On the US

Greece has definitely made it to every market story headline in the US, with at least one mention of the country if markets go below the red line. However, this Business Insider report has broken down crucial US-Greece numbers, and it suggests that the Greek tragedy will not have a great or long term impact on the US economy. US banks have loaned nearly $12.7 billion to Greece, which they stand to write off as bad debt, however, the report states that this accounts for only 0.04% of the total international lending that US is engaged in.

In terms of exports, the report states that out of the $2.25 trillion US export kitty, Greece accounts for less than $1 billion, and on a larger front, exports only accounts for one-seventh of the US GDP. US exporters, however, will feel the heat of the situation as Greece’s purchasing power will die a fast death once the deadline passes. However, US exports do stand to have an indirect impact as a contagion effect of the Greek crisis. Simply put, US exports majorly to emerging economies like Mexico, Brazil, China and Japan. Emerging economies in turn are mostly funded by European banks. If Greece were to get listed as IMF’s arrears, its banking system will collapse and most European banks are exposed to the Greek debt have to cut back on international funding due to a massive debt write off. This will bring down the emerging economies’ import bill and hence impact US.

On India

Since India tracks international economic indicators and the value of the dollar, a fallout of the Greek crisis is bound to impact the Indian stock market. Indian Industry body Assocham says that the effect of Greece failing to pay debt on the due deadline has already been factored in by the markets. However, there still might be an immediate jolt to the Indian stock and debt market. "For some time, the markets would stay in a state of flux and the rupee may lose ground if the situation in Greece worsens," the Assocham report dated June 25 said, quoting its Secretary General D S Rawat. The report also states that during this global turmoil, there is a need for India to double its efforts to strengthen the economy in terms of domestic demand, investment and cleaning up the bottlenecks.