What Would Happen If Greece Doesn’t Pay the IMF: Q&A

Cash-strapped Greece needs to repay almost 1.6 billion euros ($1.76 billion) to the International Monetary Fund next month, an obligation Interior Minister Nikos Voutsis said the country can’t and won’t meet, if there’s no deal to unlock bailout funds in the meantime.

Here’s a list of questions and answers on what can happen next:

Q: When are the next IMF payments due?

A: Greece owes the IMF about 20 billion euros in principal over the next nine years for the bailout loans it has received. Four payments, totaling almost 1.6 billion euros are due next month, starting with a 308 million-euro payment on June 5. Another 347 million euros are due June 12, followed by a payment of 578 million June 16, and 347 million euros June 19. Payments to the Fund are denominated in Special Drawing Rights, a virtual reserve currency, so sums cited in euros are approximate and depend on the exchange rate between euros and SDRs.

Q: Why are payments due in June a concern?

A: Greece has lost access to bond markets and relies on bailout loans from the euro area and the IMF to refinance its debt. The country’s anti-austerity coalition is locked in talks with its creditors over the terms attached to those emergency loans. Even though no aid disbursements have been made since last summer, the government has managed to meet external payments through a combination of measures, including budget under-execution, building up arrears to suppliers and vendors, overdue taxes settlement incentives, and seizing of cash reserves of regional governments, hospitals, universities, and even the country’s bank recapitalization fund, for use in short-term state financing operations.

Whether the anti-bailout coalition will choose to exhaust its depleting reserves on IMF payments, or opt for a default if there’s no deal with creditors in sight, is a political decision.

Q: What do Greek officials say about the payment?

A: Greek government spokesman Gabriel Sakellaridis said Monday the state will strive to meet all external and internal obligations for as long as it can, adding that the country’s liquidity problems are well known. He declined to say whether state coffers have enough cash for the June payments, while the government in Athens has said on several occasions it will prioritize payment of pensions and salaries.

Greece has flirted with the idea of falling into arrears with the IMF in the past.

The country’s interior minister, Nikos Voutsis, who has no economic decision-making powers, said Sunday that payments to the IMF due in June can’t be made, and won’t be made if there’s no deal to unlock bailout funds in the meantime. Spiegel Online on April 1 cited Voutsis as saying Greece should delay an April 9 payment to the Fund and that payment was made.

Earlier this month, Greek Prime Minister Alexis Tsipras had told creditors in a letter that his government wouldn’t make the payment due to the IMF May 12. In the end, the country paid the Fund, using the reserves of its own SDR holding account at the IMF.

Q: Can Greece afford to pay?

A: A person with direct knowledge of the country’s liquidity position said Greece has enough cash at least for the payment due June 5. A prompt payment then would buy Greek officials and representatives of creditor institutions another week of time to negotiate an agreement which will unlock bailout funds and solve the problem, before the next payment is due.

Sakellaridis has said the government aims to reach a deal with creditors by the end of this month, or early June, while no issues will arise with end-May payments of pensions and salaries.

An international official involved in Greek bailout talks said earlier this month that Greece can stay afloat possibly until the last week of June, if it drains all available reserves.

But the country’s liquidity situation is so tight that an accident can happen anytime. For example, if tax revenue comes in lower than projections, the government may only realize that a payment due is not possible when it’s already too late.

Q: Can Greece ask for an IMF payment to be deferred?

A: The IMF is a preferred creditor, and doesn’t restructure its loans, nor does it accept write-offs. When multiple principal payments are due over the course of a month, a country can ask permission to bundle them into a lump payment. This bundling is intended to reduce red tape in payment processing, and there are precedents of countries using this option. In the case of Greece, it would buy the country time until June 19, when the last payment is due, to reach an accord with creditors.

But the government would have to ask IMF permission to bundle payments, and Sakellaridis said Monday that this option is not being examined.

Q: What will happen if an IMF payment is missed?

A: All three of the major rating firms consider official creditors such as the IMF as a different class to holders of tradable securities like bonds. Failure to service official loans wouldn’t necessarily cause a downgrade to a “default” category. Rather, that may come into play with a failure to pay private bondholders.

At the end of the day, whether Greece is officially considered being in a state of default may not matter that much. The most immediate fallout after a missed payment would be felt by Greek lenders.

Without access to capital markets, Greek banks are bleeding deposits and rely on more than 80 billion euros of Emergency Liquidity Assistance to stay afloat. The European Central Bank can restrict or discontinue access to this lifeline all together, if it rules that Greek banks aren’t solvent or don’t have enough eligible collateral.

Much of the collateral that Greek banks have pledged against ELA is government-guaranteed bonds, and Greek sovereign notes, including treasury bills. A missed payment to the IMF would probably lead euro-area central bank governors to conclude that these guarantees are no longer eligible for emergency cash, as the guarantor is not solvent.

In a best case scenario, they would then give Greece a very short deadline to strike a deal with creditors and restore its solvency, and hence the solvency of its banks, like they didin Cyprus. Alternatively, the ECB’s Governing Council could decide to discontinue ELA immediately, thus forcing the immediate imposition of a prolonged bank holiday, followed by draconian capital controls.

Q: What will happen next?

A: Greek banks don’t rely on government guarantees just for liquidity. Much of their regulatory capital also consists of deferred tax claims against the state. The Frankfurt-based regulator could also conclude that these claims are no longer eligible. In short, the solvency of Greek banks, whose biggest shareholder is the Greek state, is directly dependent on the solvency of the Greek sovereign. And the call on whether they are solvent will be made by the ECB and its Single Supervisory Mechanism in Frankfurt.

A bank holiday and a cap on ELA, after a missed IMF payment, may give the government a short-time window to strike an agreement with creditors. If an agreement is not reached, Greek banks will fail, incurring losses on depositors, and setting the country on course to exit the currency bloc.

Q: What will the IMF do?

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.


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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam