Less Than Surprising News; Greece Can't Make The June IMF Payments, Default Looms

By Tim Worstall, Contributor

MAY 24, 2015 @ 5:57 PM

Forbes

This isn’t exactly the most surprising news we’re going to be told today but Greece is announcing that it simply won’t be able to meet the upcoming repayments due to the IMF in June. We’ve all known that at some point this moment would come: without the unlocking of the final tranche of the earlier, seconed, bailout there was no imaginable manner in which Greece could make all the payments due over the summer. Not unless some miracle happened with tax revenues that is, and as the country’s back in recession that’s not going to happen either.

However, worth noting that this doesn’t actually mean default in June: things move rather more slowly than that.

Here’s the news itself:

Greece cannot make debt repayments to the International Monetary Fund (IMF) next month unless it achieves a deal with creditors, its interior minister said on Sunday, the most explicit remarks yet from Athens about the likelihood of default if talks fail.

Shut out of bond markets and with bailout aid locked, cash-strapped Athens has been scraping state coffers to meet debt obligations and to pay wages and pensions.

After four months of talks with its euro zone partners and the IMF, the country’s leftist-led government is still scrambling for a deal that could release up to 7.2 billion euros ($7.9 billion) in remaining aid to avert bankruptcy.

“The four installments for the IMF in June are 1.6 billion euros ($1.8 billion). This money will not be given and is not there to be given,” Interior Minister Nikos Voutsis told Greek Mega TV’s weekend show.

As I say, this isn’t actually all that much of a surprise. The only question in minds recently has been when this would happen, not whether. Others have been saying that the problem is more fine grained than that:

On Thursday, a spokesman for the left-wing Syriza party said that Greece won’t be able to pay the next tranche of 300 million euros to the IMF on June 5 unless it receives extra financial aid from creditors.

“Now is the moment that negotiations are coming to a head. Now is the moment of truth, on June 5,” Nikos Filis, spokesman for Syriza party lawmakers, told ANT1 TV channel. “If there is no deal by then that will address the current funding problem, they won’t get any money.”

It’s not just the 1.6 billion in June, it’s the 300 million the week after next. And Varoufakis, the finance minister, has been pointing out:

Finance minister Yanis Varoufakis said Greece had made “enormous strides” at reaching a deal with its lenders to avert bankruptcy, but it was now up to the institutions to do their bit.

“We have met them three-quarters of the way, they need to meet us one-quarter of the way,” he told BBC on Sunday.

Mr Varoufakis also said it would be “catastrophic” if Greece left the Eurozone, predicting it would be “the beginning of the end of the common currency project”.

He said in the last four months Athens had managed to pay public sector salaries, pensions and dues to the IMF by extracting 14 per cent of national output.

Well, those public pensions and salaries aren’t really by “extracting” national output, that’s just the regular cycle of taxation and spending. But yes, the repayments of capital on the debt are extraction, but they’re also a lot smaller as a percentage of GDP than that.

As I say, we could all see the debt repayment schedules, we could all see that it couldn’t last forever, and the only question was when the crunch came.

As to the Eurogroup, the creditors, moving towards the Syriza position, there’s not really mjch more they can do. They’ve already relaxed, or at least indicated that they’re willing to relax, the target for a primary surplus this year and next. The last two sticking points are about domestic Greek policy on wages (both raising the minimum wage and hiring more governmernt employees) and labor protections (how tough is it to fire someone?). And the creditors just aren’t going to give ground on these. Because they regard them as essential to allowing the Greek economy to grow in the future into being able to repay the debt. To not insist on these would, by their understanding (whether that understanding is right or wrong is another matter) be simply condemning everyone to a default a little later on. So they’re just not going to agree. Maybe Syriza has moved a lot: but whether that movement is enough depends upon views of how extreme the original positions were. Too much so say the creditors.

As to what happens next a default to the IMF does not in fact count as a default immediately. We might call it a default event, even a default-like event, not a default. First, the IMF waits 30 days, then informs the Board that the money hasn’t been received. At which point they’ve quite a lot of leeway. While this isn’t formally what happens in reality: if they think that the country is really trying to pay, has paid some of it, then no default is declared, some shuffling of the problem out of the way happens. If they think that the debtor is simply being recalcitrant, then default is declared, although no rich country not in complete extremis has ever done so. What then happens is, although it doesn’t absolutely have to, a triggering of the cross-default clauses. You’re in default to your most senior creditor? And the IMF is your most senior creditor, then you’re in default to them all.

So, even if the IMF isn’t paid on June 5th it’s really July 5th and beyond that the fireworks really start. By which point, of course, one side or the other might have caved, the last tranche of the secnd bailout is delivered, the IMF paid and on the circus goes. Or not, as the case may be.