Greece has to repay loans of 2.4 billion euros in April and another €3.8 bln in May. Left without any sources of external borrowing since last autumn and excluded by the ECB from every possible borrowing facility after legally limiting the amount of T-bills that Greek banks can hold, the Greek state is running incredibly short of cash. Questions are now growing around whether Athens will be able to make a €450 million payment to the IMF on 9 April.
While it is well known that no country has defaulted on the IMF in its 70-year history, it is less well known that there have been a number of late payments.
That said, the large majority of these arrears are made up of countries such as Sudan, Zimbabwe and Somalia – not Greece. Furthermore, the total amounts are far below what would amass if Greece stopped making regular payments to the IMF – its total payments this year to the IMF are €9.7bn.
IMF internal reaction
The first step would be the IMF reaction. As detailed in the IMF’s ‘Strategy on Overdue Financial Obligations’, there would actually be little action until 1 month has passed. Before then, the Fund would continue to push the state for prompt payment. After a month, the IMF’s Managing Director Christine Lagarde notifies the IMF Board that an obligation is overdue. This is the point where the country is officially considered to be overdue on the payment, in the sense that this is where the knock-on effects would kick in.
Potential knock-on effects
The real problem may not actually be the IMF reaction – given its presence as senior creditor it is confident of getting paid back in full at some point – but the knock on effects of not making good on payments to the IMF.
IMF stops cooperating with Greece – One of the biggest problems for Greece is that it is still working with the Fund and relies on its sign off (as part of the ‘institutions’) to get its current review completed and therefore funding released. The response of the fund on the ground will therefore be important. Of course, the fund finds itself in a bit of a circular position. It is unlikely to get paid if it does not approve Greece’s review, but how can it approve the review if it is not getting paid?
But, given that not paying the IMF is usually a course of action reserved only for war torn countries or those on the fringes of the international system, not to mention severly underdeveloped economies, Greece could suffer a further dent to its reputation and credit rating.
After one month, when Lagarde notifies the IMF Board about the overdue payments Greece can be considered in default on its EFSF loans as well. However, this is all carefully worded and qualified – it explicitly says the EFSF is “not obliged to” take such action. In the end, it seems to ultimately depend on the decision of the EFSF. It seems unlikely that it would declare the full loan to be in default. That said, pressure would rise within certain member states and national parliaments for some decisive action. Eurozone partners could also use this to further extract concessions from the Greek government.
It is uncertain then whether default clauses on any loans or bonds would be triggered. Even if they are not, the ECB may reconsider its provision of Emergency Liquidity Assistance (ELA) to Greek banks and would likely refuse to raise the limit further. This is likely because of the huge reliance of Greek banks on the state – which would clearly be struggling for cash. Given that the very public act of not paying the IMF may further increase uncertainty and deposit outflows, the impact of limiting ELA could be exacerbated and cause a serious funding crunch for Greek banks and indirectly the economy and the state.
Overall, the short term impact of not paying the IMF may not immediately be dire in economic and financial terms, though of course it would involve serious reputational damage and further widen the already mammoth gap between Greece and its creditors. It may take a month before cross default clauses could be triggered and even then it rests with decisions of highly political institutions such as the EFSF. Such decisions would likely be managed to achieve the least controversial ends, but equally could quickly spiral out of control. Less certain is the response of the ECB, which would once again be the key player.
Open Europe : What happens if Greece does not pay the IMF on time? Raul Ruparel
Open Europe is a think tank with offices in London and Brussels and an independent partner organisation in Berlin, promoting ideas for economic and political reform of the European Union