Greek Default for Dummies: Your Questions Answered on Creditors

Greece has to come up with about 4 billion euros ($4.5 billion) by the end of May for debt payments. Then there’s the 1.5 billion-euro monthly tab for salaries and pensions.

As Prime Minister Alexis Tsipras’s government in Athens haggles over the details of its reforms and leans on its banks to keep buying Treasury bills, the question inevitably looms: what happens if the cash runs out?

Not all creditors are created equal. For example, the International Monetary Fund is more equal than others, first in the repayment queue.

Here are some of the questions you may have, starting right at the very beginning:

Q: What is a default?

A: defines default as “the failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment.”

Q: How much debt does Greece have?

A: The Greek government has about 313 billion euros of debt outstanding, most due after 2021. Add companies and banks and the total is closer to half a trillion.

Given that Greek banks are likely to refinance most of the maturing Treasury bills without protest — with pension funds and local governments making up the shortfall — the important near-term deadlines are May 6 and May 12, when the IMF is due to receive almost 1 billion euros in total.

The real crunch comes midyear, when almost 7 billion euros of bonds held by the European Central Bank mature in July and August.

Q: What happens if the IMF isn’t paid?

A: A missed payment date starts the clock ticking.

Two weeks after the initial due date and a cable from Washington urging immediate payment, the fund sends another cable stressing the “seriousness of the failure to meet obligations” and again urges prompt settlement. Two weeks after that, the managing director informs the Executive Board that an obligation is overdue.

For Greece, that’s when the serious consequences kick in. These are known as cross-default and cross-acceleration.

Q: What are cross-default and cross-acceleration?

A: Failure to pay the IMF would entitle some of Greece’s other creditors, including the European bailout fund, to declare a default. They would then have the option to demand immediate repayment of all their loans, a process known as acceleration.

Other lenders could then follow suit. While calling a default preserves creditors’ claims, acceleration — the bit that hurts — isn’t automatic. Each creditor decides on its own.

To varying degrees the debt is linked in a web of cross-default and cross-acceleration clauses that make it safe to assume that one default and acceleration would trigger demands for repayment on most, if not all, of the rest.

Greek debt features a variety of structures, with different terms and conditions and governed principally by Greek and English law. The obligations include bonds whose holders voted not to take part in a 2012 restructuring; notes issued in that restructuring; bonds held by the ECB; a series of loans from Europe’s bailout fund, including one used to sweeten the restructuring pill; notes issued last year; the 2010 Greek Loan Facility; and the IMF loans.


Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.