Why are we asking this now?

Greece is at risk of defaulting on its debts. It has been funneled huge amounts of money by international organisations such as the IMF, and has borrowed large amounts of money from private investors on international money markets. But the continuing downward trajectory of Greece’s economy and the tough rules that have been imposed on the country by lenders mean that the country is running out of money. In coming weeks Greece faces a number of repayment deadlines as well as a large salary bill for government employees. Analysts suggest that the country will not be able to meet these payments.

What do we mean by “default?”

When a government—or company—is unable to meet debt repayments, then it is said to be in default. In such cases, a one-off failure to make a payment is taken as a sign that the government in question is unable to pay back not only that specific debt, but all other debt. There then follows a complete collapse of market and international economic sentiment towards the defaulting government’s financial position.

Have any countries defaulted recently?

One recent painful example of government default came in the summer of 1998, when Russia defaulted. A worsening fiscal position combined with a fall in demand for oil and an economic crisis in Asia had all damaged the Russia economy. The international money markets, aware of this gathering problem, started to sell roubles, causing the value of the currency to plummet. The crisis became so acute that Yeltsin was forced to default. The consequences for Russia were appalling, both in terms of reputation and economic hardship. There were also very severe and unexpected knock-on effects in global markets. Most famous was the collapse of Long Term Capital Management, the stellar Wall Street hedge fund, which had made investments based on assumptions about the value of the rouble. LTCM’s failure was so shattering that the New York Federal Reserve bank was forced to arrange a rescue to stave off a systemic financial crisis in the United States.

What would happen if Greece defaulted?

If Greece defaults on its debt, then it would lose full access to the European Central Bank. Unable to maintain an effective currency mechanism it could then be forced to drop out of the eurozone: to leave the euro and create a new currency for itself which would be worth considerably less than the euro. To do this effectively, the government would have to stop Greek savers from getting their money out of the country before it was converted into the new, much less valuable currency. This would require currency controls and a measure of surprise—there would be no warning to prevent panicked capital flight. The Greek government would then face a severe economic crisis combined with an inability to borrow from international markets or institutions, except at the most punishing interest rates. The wider consequences of a Greek default are hard to predict—some analysts say global economic disaster, others that a Greek default would be manageable, and would not necessarily require Greece to leave the eurozone. The interest rates currently being charged for Greek debt suggest that markets are expecting Greece to default—but the truth is that we do not know. It is that uncertainty which is currently proving so corrosive.