The biggest danger of a Greek default could be political instability

When recession exposed the glorified pyramid scheme that was Greek government budgeting in 2009, fear of a global economic meltdown on a par with the collapse on Wall Street a year earlier rippled through international markets.

The budget crisis was eased, but not before a short-lived panic in the financial markets. Now, as Greece once again peers over the precipice of expulsion from the Eurozone common currency club, millions worldwide are wondering what consequences lie ahead for other countries and investors if, as now appears likely, Athens defaults on its bailout debts Tuesday.

Early Tuesday, Greek Finance Minister Yanis Varoufakis confirmed the country will not make its payment due later to the International Monetary Fund, the Associated Press reported.  

Economists and financial strategists seem confident that the world will weather the latest crisis with minimal long-term disruption. Thanks to intervention plans crafted by the European Central Bank over the last three years, there are cash reserves on hand for emergency lending to other heavily indebted Eurozone countries and a $1.2-billion bond-buying fund to protect the most vulnerable in the event that a Greek default sends interest rates from private lenders skyrocketing.

This time around, the greater peril for Greece's neighbors and allies is the political fallout that could follow a failure of Athens' revolving-door leaderships to alleviate the pain from creditor-demanded austerity measures that have shriveled the economy and boosted unemployment to 26%.

The leftist firebrands of the Syriza party took power from the conservatives in January after campaigning on the promise that Greeks could demand debt relief but still retain the euro as their currency. They have instead led the country into a high-stakes standoff with the other 18 Eurozone nations, which have cut emergency cash infusions to Greek banks, prompting their temporary closure and a suspension of stock trading.

What lies ahead for a country that has already run the ideological gamut of political leaders in recent years, with none able to ease the crisis, may be a return to the more profound instability and tumult that afflicted Greece for decades before and after World War II — civil war, military coups and dictatorship.

"Will democracy survive in Greece? If things get too bad, they've tried every political party already and they all screwed up," said Jim Angel, a finance professor at Georgetown University's McDonough School of Business. He points to Venezuela's late leftist strongman, Hugo Chavez, as an example of a military autocrat coming to power and "systematically dismantling democracy."

Greece is a member of the North Atlantic Treaty Organization. The rise there of an authoritarian regime, especially if Athens drifts further into alliance with Russia, would present major challenges to the unity and function of the Western security pact and add insecurity to Europe's economic woes.

Greek Prime Minister Alexis Tsipras has engaged his country in a perilous game of chicken with its major creditors, defying Tuesday's deadline for payment of $1.8 billion to the International Monetary Fund as well as the "troika" of lenders' conditions for extension of a repayment plan on Greece's $270 billion in bailout loans. The current bailout program expires Tuesday, which will cut off Athens from further borrowing to pay its international obligations as well as salaries for government workers and pensioners due on this last day of the month.

Monday was the first trading day since Tsipras signaled an end to negotiations with creditors Saturday by announcing that the government was leaving it to Greek voters to decide whether to accept the additional burdens of government spending cuts in exchange for a new bailout deal. Tsipras called a referendum for Sunday — five days after the deadlines for averting default and exclusion from new credit.

Markets dropped worldwide, with major European bourses losing 3% of their value and Asian and U.S. traders seeing shares plunge by 2%. Even so, trading volume was moderate, a sign that the latest Greek brush with disaster was foreseen and unlikely to unleash widespread panic.

The other Eurozone nations continue to call for an eleventh-hour agreement from Greece to accept the extension terms laid out during months of haggling with the major creditors, which include the European Central Bank and the European Commission as well as the IMF. Leaders of the lending institutions have said a "yes" vote by Greeks on Sunday to take on the additional belt-tightening could spur new negotiations on a deal to keep Greece in the Eurozone, which a majority of Greeks tell pollsters they want.

Tsipras and much of his government, however, are urging Greeks to vote "no" on the new bailout terms, deepening the social divide between those willing to suffer through more austerity to keep the euro and those who think defaulting on their obligations will somehow force the creditors to ease the terms for repayment.

Whether the majority votes for or against the creditors' proposals, gross dissatisfaction with the current government can be expected. A "yes" vote would demonstrate rejection of the Tsipras strategy in this sixth year of crisis, which may prompt his resignation or spur another military or political faction to take over by force.

Unrest has spread in recent days, with rival pro- and anti-Europe rallies flaring in Athens, the capital that is home to 40% of Greece's 11 million people. That concentration of the dispute provides a political cauldron for the opposing camps that could become increasingly violent as people struggle with an economic twilight zone or submit to creditors' demands for deeper cuts in pensions and public services. And social disorder could chase away tourism, which had lately been on the rise and accounts for at least 17% of the nation's income.

Even if Greece exits the Eurozone in a relatively peaceful and democratic manner, the first dropout from the ambitious experiment to create a continental nation-state would deal a blow to the European Union founders' vision of a vibrant United States of Europe in which the rising tide of growth lifts all national boats.

Failure of the unity experiment, even if now limited only to Greece among the European Union's 28 states, raises the prospect of other countries bailing.

"If Greece exits the euro, then the idea of the irreversibility of euro membership vanishes," Raj Badiani, senior economist at the IHS research firm, wrote in an investors' note Monday. Worries over depletion of the union and retreat from its goals of common political, economic and security policies would undermine confidence in Eurozone members' commitment to reform. That would lead investors to increasingly scrutinize pledges to fight corruption and bureaucracy and harmonize regulations.

During the last major Greek debt crisis, soaring interest rates demanded of other indebted Eurozone members, in particular Spain, Italy and Portugal, raised the prospect of contagion that could tank their economies with unpayable levels of debt servicing. That is a risk that has been successfully averted this time, many analysts say, because of the emergency rescue programs adopted by the European Central Bank.

Southern members of the Eurozone also have healthier economies this time around, because their more stable governments adhered to the lenders' formulas for balancing their budgets and stimulating growth.

"Nobody would expect Portugal and all of the others to leave any time soon; there doesn't seem to be enough public support for that," said Douglas Elliott, a fellow in economic studies at the Brookings Institution. "But it makes it possible to consider that in five or 10 or 15 years, maybe circumstances would be different. So as a rational investor, you'd have to factor that in" in deciding to invest or lend to other struggling Eurozone countries.

The European integration project will succeed only if all nations are willing to compromise, because "no one can get 100%," German Chancellor Angela Merkel said Monday, describing the creditors' last offer to Greece as generous and unjustly spurned. She blamed Athens for the collapse of negotiations.

Special correspondents Lauren Frayer in Madrid and Tom Kington in Rome, and Times staff writers Dean Starkman, Hugo Martin, Samantha Masunaga and Alexandra Zavis in Los Angeles contributed to this report.

Copyright © 2016, Los Angeles Times

UPDATE

June 30, 6:05 a.m.: This story has been updated with the Greek prime minister's confirmation that payment will not be made to the IMF.

This story originally posted June 29 at 9:35 p.m.

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