Greece Stirs Doubt on Debt Owed IMF

Cash-Strapped Athens Suggests It Might Be Short on Some March Payments

By IAN TALLEY And  ALKMAN GRANITSAS

Feb. 27, 2015 7:33 p.m. ET

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Greece’s cash-strapped government suggested in the past week that it might default on some of the debt it owes the International Monetary Fund in March, which would make it the first advanced economy in the institution’s seven-decade history to fall into protracted arrears with the fund.

It would also put the new Athens government on a par with a small group of mostly conflict-ravaged debtors that have stiffed the IMF—a list that includes Afghanistan’s Taliban, Zimbabwe strongman Robert Mugabe and coup-stricken Haiti.

Few expect Greece to shirk its debts to the IMF, but the suggestion alone highlights the deepening standoff between the fund and Athens over the country’s finances. It also underscores the increasingly precarious cash position of the government and signals that coming negotiations between Greece and its creditors are likely to be rocky.

In interviews this week, Greek Finance Minister Yanis Varoufakis and other officials, while assuring the public that government-paid pensions and salaries weren’t at risk, said debt payments to the IMF and the European Central Bank were. Greece owes the IMF more than $20 billion, including $1.7 billion due in March.

Mr. Varoufakis told Greek radio Wednesday that it was “certain” Greece would have a problem “paying off the installments of the IMF” falling due in the coming weeks, and those owed the ECB this summer.

A senior adviser to Prime Minister Alexis Tsipras on Thursday said Greece was prepared to ask for an extension on its IMF debt. “If we haven’t collected the 1.4 [billion euros] and, say, have collected 0.8 [billion euros] we will ask for an extension of two months,” said Greek Minister of State Alekos Flabouraris. “I don’t understand, what is the difficulty?”

The statements, which followed tough criticism Tuesday by the IMF and the ECB of the government’s proposed new economic overhaul, may be a tactic designed to wrest more financing from its major creditors.

For example, Athens may be trying to leverage ECB support for Greece to issue more short-term debt. Mr. Tsipras’s government, elected last month on an anti-bailout platform by an electorate tired of years of painful economic crisis and budget belt-tightening, is trying to negotiate easier bailout terms with the IMF, the ECB and the European Commission.

But the tactics could backfire. Refusal to pay the IMF would play into U.S. lawmakers’ concerns that the IMF’s historically large bailout of Greece was a bad and risky investment. It also would vindicate earlier critics who said the IMF should have required a debt restructuring as part of the fund’s first bailout five years ago.

And it could tip the creaking Greek economy over the edge by sparking a bank run and investor exodus.

The IMF is viewed by investors as the most senior creditor around the world. Failure to pay the IMF would fuel worries that Greece’s government could stiff all the country’s creditors.

“You’re talking about really wayward countries that fall into arrears with the IMF,” said Desmond Lachman, a fellow at the American Enterprise Institute and former senior IMF economist.

“The way you put an end to that is to show you’ve got good relations with the people who can finance you and help you get through your difficulties,” Mr. Lachman said. “That’s why this is a stupid negotiating tactic.”

In essence, Greece’s government, which had previously pledged to meet all its debt obligations, is now rejecting the terms agreed on by the fund’s 187 other member countries when they approved an emergency rescue package.

Normally, if a country that already owes the IMF cash needs more emergency financing, the government will agree to a new economic-overhaul plan for additional fund resources. Such a country will be able to use some of the new IMF cash to pay off its debt to the fund.

Ukraine’s new government, for example, is preparing to more than double energy bills, slash government spending and approve a host of new economic policies in order to win an expanded IMF bailout. It will be able to use some of that money to pay back upcoming bills due to the fund.

Greece’s new government doesn’t want to meet the IMF financing conditions agreed on by previous administrations. Mr. Varoufakis says Athens will suspend or reverse roughly a third of the economic overhauls promised to the IMF and its European creditors, and even then the government remains vague about some of those promises.

Using blunt language in a letter Tuesday, IMF Managing Director Christine Lagarde said Greece’s latest pledges fall well short of the terms necessary to trigger a release of more financing. Her criticism was echoed by a similar letter from ECB President Mario Draghi .

Meanwhile, Greece’s cash crunch highlights one of the first problems to arise even though Athens won a four-month extension from its European creditors of its existing €240 billion ($273 billion) bailout earlier this week.

Although the extension buys the government time, it provides no interim financing until Greece meets certain reform targets.

Until then, Athens and eurozone officials are looking at ways to tide over Greece. Athens has proposed a number of alternatives: increasing the amount of treasury bills the government can issue; using European and central bank profits owed Greece to pay the IMF; and drawing on cash reserves held by state bodies—like the unemployment insurance fund—that are not needed right now.

Write to Ian Talley at ian.talley@wsj.com and Alkman Granitsas at alkman.granitsas@wsj.com