Greece: What The IMF Missed Payment Means For The Country And The Euro

At midnight last night (Tuesday), Greece formally fell into arrears with the International Monetary Fund after missing the deadline for a Eu1.5 billion payment. This has been coming for months and even years. But it’s not quite the same as a default. So what does it really mean?

1. No more safety net. When you default with the IMF, there’s no more money until you sort yourself out. “We have informed our executive board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared,” an IMF spokesperson said in the early hours of the morning (Greek time). That’s just the start. Not only does Greece lose access to IMF resources, it can then be kicked out of the IMF completely. The loss of this access to emergency funding is not just about the money itself: it also affects investor confidence in the country’s ability to recover, since one source of bailout funding has now gone.

Incidentally, this was the biggest payment ever missed to the IMF. Greece owes the fund Eu35 billion in principal, and is due to pay Eu5.5 billion of it this year.

Source: CNBC

2. It’s not a default, but it might as well be. In a detailed and usefulpublication yesterday,  Standard & Poor’s spelled out exactly what would constitute a default for it and other rating agencies. Failing to repay the IMF is not, for S&P, a default, because its sovereign ratings assess a sovereign’s ability to pay financial obligations to commercial creditors, not other kinds of debts. Similarly, if Greece fails to pay the Eu3.5 billion in bonds it owes to the European Central Bank on July 20, that won’t be a default either, as those are a consequence of a bond swap from early 2012 orchestrated through an ECB programme. Formal default will instead come if (when) Greece misses a payment on a commercial obligation, perhaps Eu2 billion of treasury bills due on July 10, Eu83 million owed on a Japanese yen obligation on July 14, or Eu71 million of interest due on July 17 on a three-year commercial bond. According to S&P, Eu39 billion of Greece’s total Eu261 billion medium and long-term debt is commercial – equivalent to 22% of GDP – and the rest is owed to official creditors.

But does this definition really matter? Wherever this fits in rating agency methodology, Greece has missed a substantial and vital payment, and this is surely the beginning of a path towards formal default. As S&P also says: “We also expect Greece to default on its commercial obligations.” This is why S&P has downgraded Greece to CCC- with a negative outlook.

3. Other sources of funding are drying up. In a slightly surprising move last night, Greece made a last-minute call for a third bailout from the eurozone’s rescue fund. Greece asked for Eu29.1 billion, and got a somewhat cool response. This will, apparently, be assessed under normal EU procedures – i.e., not in a rush – and certainly not before Sunday’s planned referendum.

The problem with Greece’s request is twofold: it has come far too late, and it has come from a government that won’t implement any of the economic reforms that official lenders believe need to be enacted in order to complete the existing bailout