It should be no surprise that eurozone finance ministers failed to agree to disburse €2 billion in bailout money to the Greek government today or to release bank recapitalization funds. Despite optimism following the recent announcement of a relatively benign program for recapitalizing Greek banks, it is hard to escape the conclusion that the Greek program again is headed off track. The government has fallen behind its reform commitments, and a substantial number of additional end-year measures look unlikely to be met. Even with substantial forbearance from Greece’s European partners, it now looks likely that conclusion of the first review of its program will be delayed and that the promised debt relief negotiation will come only in 2016. Further, an eventual International Monetary Fund (IMF) program is likely to be small and leave a large unfilled financing gap that will further strain Greece’s relations with its European neighbors. It is hard to predict how long Greek voters will continue to support a government that cannot deliver on its economic pledges of low debt and sustainable growth.
This is how Grexit happens. Following the collapse of negotiations between Greece and its creditors, the European Central Bank (ECB) has halted emergency liquidity assistance. Facing an intensified bank run, the Greek government on Sunday introduced banking controls and declared a bank holiday. With substantial wage and benefit payments due this week and local banks out of cash, economic conditions are likely to deteriorate quickly in Greece ahead of a planned referendum for July 5 asking Greek voters whether the government should accept a creditor-backed reform plan.