What happens if Greece defaults?

The cash-strapped country urgently needs an €7.2billion (£5.6billion) bailout loan to stay afloat, but so far it has been unable to reach an agreement with EU creditors over the terms attached to the cash.

Until Greek and European leaders reach a lasting solution to the crisis, Greece's future inside the eurozone looks highly uncertain and a so-called 'Grexit' a strong possibility.

In the short-term Greece faces a number of debt repayments in June to the International Monetary Fund. The first is a €300million (£216million) payment scheduled for Friday.

So what happens if Greece does not pay back this cash or any of the other repayments that it is required to make?

No one knows exactly what would happen if Athens were to default but it would likely cause a knock-on effect leading to a chain of events that could spiral out of control.

Bank Run

One of the first outcomes of a Greek default is likely to be a run on the banks, as ordinary people, businesses and investors lose confidence in economy and move to get their cash amid fears national institutions will go bust.

However, a bank run is a self-fulfilling prophecy as banks need customer's cash to keep functioning. If savers attempt to remove all deposited cash all at once, a bank will indeed go bankrupt. In this event, the government may close banks to stop withdrawals or impose fees or charges.

In fact, Greece has already been seeing a slow-paced bank run that has been picking up speed in recent weeks. Savers withdrew €300million from accounts in just one day at the end of last week.

So far, the Government has not made a move to stop outflows, but this could soon change according to some market observers.

Michael Hewson, chief market analyst at CMC Markets UK, said: "With the Greek banking system continuing to haemorrhage cash to the tune of another €800m in the last two days, it surely can only be a matter of time, in the absence of any agreement, before capital controls get implemented."

However, there are fears that if the government tried to introduce a tax there would be riots and extreme demonstrations in the streets.

The government would need to quickly get a hold of the situation to avoid internal turmoil that at the worse could lead to looting and violence. 

Back to the drachma

If Greece defaults on its debts, it is almost certain that it won't be able to stay as a member state of the eurozone and will have to leave the euro.

This would likely mean a return to its previous currency the drachma. At the moment, the Greek economy is in one of the worst recessions of all time.

But a change to a devalued currency could help the ailing economy because it would make Greek exports cheaper to neighbouring countries and help give them a boost.

However, as the Greek government has no cash - and a default would mean that few institutions or investors are likely to lend the government any cash - it could have to in effect print its own money.

This could cause Greek inflation to go through the roof and see ordinary families struggling to afford the basics needed to live. 

Eurozone woes

Greek investors would have to write off all debts to Greece which could cause heavy losses and badly damage confidence in the eurozone, at worst leading to another economic crisis on the continent.

Europe is the UK's main trading partner and it's unlikely that Britain's economy would be immune to the effects of another eurozone recession.

The German economic minister has already warned that a Greek bankruptcy would have "gigantic" effects on Europe and George Osborne has previously warned that the Greek crisis is a major threat to the UK's economic recovery.

Immigration crisis

Greece is already struggling to cope with waves of immigrants landing from Africa and crossing through from Asia.

If it's economy is plunged into further crisis, it's unlikely to have the resources to cope with influxes of people and could quickly find that it is overrun by illegal immigrants. This could cause crime and create further social unrest within the country.

Political unrest

If the quality of life for Greeks dramatically declines, dissatisfaction with the government could quickly escalate and it may be forced to hold new elections.

In the worst case scenario the absence of an effective government could provide an opportunity for extreme and terrorist organisations to wield their influence.

(Πηγή: express.co.uk)