Greece Analysis: 9 Essential Facts about The Crisis and the $1.78 Billion Debt Default

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PHOTO: Greek Prime Minister Alexis Tsipras

Amid the economic crisis for Greece and the Eurozone, with Athens defaulting on Tuesday on a €1.6 billion ($1.78 billion) repayment to the International Monetary Fund, André Broome of the University of Warwick sets out nine essential facts to put the developments in perspective, writing for The Conversation:


1. The long-term damage may yet be minimal. If Greece is only in arrears to the IMF for a short period of time, it may be shown leniency down the line. The IMF’s policy on overdue payments distinguishes between short-term and protracted arrears.

2. This is not yet a full-blown sovereign debt default by Greece. This is still a first for an European Union member state, but the IMF is keen to maintain a distinction between a country being “in arrears” and a “default”. This important semantic distinction is also made by major credit rating agencies. It means the consequences for Greece may be temporary and small, if they are able to find a speedy resolution and make the payment.

3. Being in arrears to the IMF is not a new phenomenon. Since 1997, arrears owed to the IMF that were at least six months overdue have ranged from €1.5 billion to €3 billion in any given month. This is not a position any country wants to be in, however. It places Greece in the company of countries whose governments are widely seen as dysfunctional, or even “failed states”. The only countries with IMF repayments at least six months overdue in the past decade have been Somalia, Sudan, Zimbabwe and Liberia.

4. The IMF will not allow any country to access its resources while it remains in arrears. For the IMF to be involved in any future new support package, arrears payments will first need to be settled, without the possibility of rescheduling payments. This makes Greece even more dependent on EU funding to bring liquidity back to its banks – making the outcome of the July 5 referendum even more important.

5. The IMF may now treat Greece even more harshly. It is hard to overstate how seriously the IMF takes the issue of prompt repayment of loans. In the past, countries that have deliberately missed payments have had to make significant moves towards adopting IMF policy preferences in order to regain access to its financial resources. This could include things like meeting stricter spending targets and enacting fundamental tax and pension reforms to gain future access to funds.

6. Greece is the IMF’s biggest-ever debtor. This means the stakes for the IMF are higher here than in other countries. Greece’s €1.6 billion payment would be the largest payment ever missed to the IMF.

7. Future relations are going to be tricky. It is difficult to see how the IMF could work with the Syriza-led coalition government after this default. There is an intense political dimension to the stalemate with the country’s creditors. The IMF does not like countries playing hardball over loan conditions. It likes populist appeals and inflammatory rhetoric even less. And it is fundamentally opposed to giving favourable deals to governments that violate their obligations to the organisation.

8. Greece’s default is a disaster for the IMF’s credibility. There is no positive spin that can be put on this. The IMF relies on countries making their payment obligations no matter what. This is why so few countries in recent years have gone into protracted arrears with the IMF. Greece’s credibility is already in dire straits, but the IMF has much to lose from its largest debtor “behaving badly”.

The IMF is already under fire from developing countries where Greece is seen as receiving special treatment. Unless the IMF brings the hammer down on Greece now, future borrowers outside of Europe will also delay IMF loan repayments when it is inconvenient.

9. Expect a severe response. If no quick resolution is found after Greece’s referendum on its bailout, the IMF must react strongly to preserve its credibility with other debtors. In the short term, the IMF is likely to step back sharply from seeking a compromise position with Greece. The IMF will insist the government makes key policy changes and meets its scheduled repayments before bailout negotiations can resume.

In the longer term, if Greece remains in arrears, the IMF could take the extreme step of suspending the country’s membership. Even if Greece didn’t need access to IMF resources, being suspended from the organisation would be another first for an advanced economy, and would see Greece’s reputation in the international financial community plummet further. Countries that remain in protracted arrears, such as Zimbabwe, have to complete an informal “staff-monitored programme” of policy conditions without funding as part of the process of normalising relations with the IMF.

Taken together, these nine points highlight the dangerous waters that Greece, the IMF, and the EU have now entered. Regardless of the referendum result, it is difficult to see the IMF cooperating with the government in Greece in the near future. Either fresh elections or a monumental change in policy direction will have to occur for that to happen.

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4 COMMENTS

  1. The situation is even much worse than it is described here. Greece is the first industrial country ever squandering a deadline for payment – with a historic record amount.

    Greece is on par with most inglorious countries ike Iraq, Sudan, Zimbabwe, Haiti, Somalia, Bosnia and Afghanistan. Greece can not be compared in terms of its level of development with these countries.

    But what is the reason for the disaster? Greece is a clientelistic state. Neither the administration nor the tax authorities work properly. Varoufakis himself has described that tax increases would not be so important – because taxes arrive anyway rarely at the tax authorities.

    Until Samaranch policy in Greece has worked that votes were paid with very well-payed jobs. This meant that from from 11 million Greeks 10% had worked in the administration – unfortunately without the qualifications necessary for the tissue……

    Another telling example: Crete has been equipped with excellent photovoltaic systems. The investments were so successful that the oil consumption for the electricity production has dramatically decreased.

    The family benefiting of the oil shipments influenced successfully the crete goverment drastically reducing the current electricity prices of photovoltaic systems. The old oil consumption has been restored, with the result that the trade balance went more negative and the photovoltaic industry lost many modern jobs und factories have been decommissioned.

    Already nearly 1 year ago, the IMF was surprised because his actions did not show any positiv effect – in Greece – unlike for example in Spain, Portugal and Ireland. As Lagard found out that the negotiations were conducted by irresponsible lieing layman (Tsipras and Varoufakis) there was even a tendency of LaGard to withdraw from the negotiations because the IMF was called by Zypras as a criminal organization……

    Of course, the amount of owed mony is a problem. But the much more bigger problem is to upgrade the state organisation on a level that investors do not have to wait 5 years to get the approval for building a factory. There is also a list of tax evaders over 70 billion euros.(The La gard list) But as long as the Greek government is unable to collect taxes every euro the EU put into it is seeping in this thicket.

    The IMF was entirely the wrong organization working in Greece. Greece is developmentally on the level of a developing country – it would have been a
    a teaser for the World Bank. This is the actual error to the EU has made.

    • So it’s the banks fault that the democratically elected governments in Greece left them bankrupt? Sooner or later you have to pay for all those handouts. It’s pretty incredible that German taxpayers were paying for Greek pensions. I wouldn’t expect you to understand this.

      • “So it’s the banks fault that the democratically elected governments in Greece left them bankrupt”

        Of course not. Despite that we can assure that the IMF knows -same as it knew in the case of Argentina- it is pouring money into a black hole because it is true that “Sooner or later you have to pay for all those handouts”.

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