What Happens if Greece Misses Payments?

The Wall Street Journal

7:05 pm ET

Jun 15, 2015

By  MATTHEW DALTON and  GABRIELE STEINHAUSER

With little sign of progress in talks on Greece’s international bailout, some European policy makers are considering whether Athens could default but stay in the eurozone. The whole situation is fraught with unknowns, however. Here are some of the complications:

June 30. Greece must repay €1.54 billion ($1.73 billion) to the International Monetary Fund. If it doesn’t, the fund would issue an escalating series of warnings that could result in Greece being kicked out of the IMF after two years.

Also, if there is no agreement by then, Greece’s bailout expires. Then the question is whether the European Central Bank would cut off Greek banks.

The ECB’s decision would be based in part on whether the ratings companies define the missed IMF payment as a default. That isn’t a given because the fund is a preferred creditor and doesn’t hold any tradable securities issued by Greece. Therefore, the ECB may not pull the plug on Greek banks immediately—even though continuing to lend to them might end up putting more funds at risk.

The Bank of Greece has extended up to €83 billion in loans to the Greek banks to replace deposits withdrawn amid the turmoil. Every week, the ECB must decide whether to allow the Bank of Greece to raise the ceiling on the amount of so-called “emergency liquidity assistance” that can be extended to Greek banks. A two-thirds vote of the ECB’s Governing Council can block a decision to extend more ELA.

Even before the June 30 deadline, Greece and the rest of the eurozone might be tempted to impose capital controls in Greece to prevent capital flight if there is no compromise in sight.

An expiration of the bailout agreement and failure to repay the IMF would lead the ECB to conclude a default is growing more likely. The ECB then likely would raise the haircut, or discount, it applies to Greek government bonds it accepts as collateral for ELA. Expiration would also raise the risk that the ECB concludes that Greek banks are insolvent. The ECB only allows eurosystem lending to solvent banks against eligible collateral.

July 10. Greece needs to repay €2 billion of treasury bills. If the ECB refuses to raise the ELA ceiling and tightens the ELA rules, Greek banks, which are now the only buyers of Greek debt, may not have enough funds to help the government roll over these treasury bills.

July 17. The problem only gets worse later in the month, when the government has to repay €1 billion in treasury bills.

Missing these payments would be a true default, although not paying the IMF could give Greece more money to cover the treasury bills.

July 20. Greece must repay €3.5 billion in Greek bonds held by the ECB. Without a disbursement of bailout cash, Athens probably won’t have enough money to repay the ECB. Athens might be cut off from external funding altogether.

At that point, the next step would be a decision on whether to leave the eurozone.

For Europe, finding a way to keep Greece in the euro could hold market panic at bay and give the Greek government another chance to make a deal. Europe is also fearful of the precedent. If Greece left, investors and others would see that euro membership is no longer irrevocable and presumably make it more likely that others follow.

In theory, Greece could default and say “we’re out” and start printing drachmas immediately. But if it tried to hold on, for instance by issuing a parallel currency and introducing capital controls while keeping the euro as legal tender, the situation could take several months to play out.