Greece’s ability to pay its debts faces a key test this week, and although a Greek government official insisted to CNBC that the country will make a major payment on Tuesday, there are doubts that the country will be able to honor future obligations.
On Tuesday, Greece must pay the International Monetary Fund (IMF) — one of Greece’s main creditors alongside euro zone lenders — 744.9 million euro ($829.9 million). It’s just one repayment in a long line due to creditors over the summer.
It comes as talks between Greece and euro zone finance ministers (the Eurogroup) have yet to reach a solution over disputed reforms — such as cuts to the pension system and a more flexible labor market — dashing hopes that Greece will receive its last tranche of bailout aid worth 7.2 billion euros.
However, a Greek government official told CNBC Monday that Greece would make Tuesday’s repayment, and that some kind of deal with the Eurogroup could be announced later Monday.
“The payment is certain,” the source, who did not want to be named due to the sensitive nature of ongoing discussions with lenders, said. They added that Greece would also be able to make several debt commitments to the IMF in June, worth around 1.5 billion euros in total.
When asked how Greece was going to make those repayments without the last tranche of much-needed aid, the official said some kind of “transitional deal” could be announced after the Eurogroup’s talks Monday.
“(We are expecting) some kind of transitional deal, something that will assist in the area of liquidity and the ability of the public sector to borrow in the short-term,” they said.
To default or not?
Greece is certainly in a parlous financial state. Not only has the country’s central government commandeered cash reserves from local authorities, but its banking system is in crisis mode.
Greek banks are relying on emergency liquidity assistance from the Greek central bank after being cut off from direct funding by the European Central Bank (ECB) because of the government’s failure to stick to its bailout program.
Paul Donovan, managing director and senior global economist at UBS, told CNBC Europe’s “Squawk Box” that Greece couldn’t afford to default on its debt to its European lenders.
“We know what happens if Greece leaves the euro zone – chaos – but if Greece defaults on a payment, does it default to the IMF? Probably not – but if it does, in a way that might be less serious than defaulting to the euro group — because if the ECB stops providing assistance to the Greek banks then we’ve seriously got a problem,” he warned.
“Because then the Greek banks run out of cash, there’s runs on the banking system and the necessity of capital controls and that then becomes a very messy situation.”