Greece owed the International Monetary Fund about €1.6 billion by 6 p.m. Washington time today, and when the deadline passed, the government did not send the cash, as expected.
So what happens once Greece joins with the likes of Somalia, Sudan and Zimbabwe, the three countries with outstanding IMF debt, and doesn’t repay?
Normally, a failure to pay gets a 30-day extension, but Christine Lagarde, the IMF managing director, has said that she will notify her executive board to take action immediately if the money, part of the total €23 billion Greece still owes, isn’t sent.
The fund has an official step-by-step procedure to be followed if a country falls into “arrears,” and POLITICO took a look (starting on page 912):
- Immediately, a cable is sent asking for payment and Greece is cut off from further Fund borrowing.
- After two weeks, the IMF sends a message to Greece stressing the seriousness of the failure to meet obligations and urging full and prompt settlement.
- After one month, Lagarde notifies her executive board that an obligation is overdue. This is the step that Lagarde says she’ll jump to immediately.
- Lagarde notifies Greece that unless the overdue obligations are settled promptly, a complaint is issued to the executive board.
- A complaint regarding Greece’s overdue obligations is issued.
- After three months, a brief factual statement noting the existence and amount of arrears is posted on the Fund’s external website. Access to Special Drawing Rights, the IMF’s reserve asset, is limited.
- For six to 12 months, the Fund re-examines access to SDRs.
- Up to 15 months, technical assistance can be suspended due to non-cooperation.
- Up to 18 months, a decision on suspension of voting and representation rights is considered.
- Up to 24 months, steps to remove the country from the IMF are initiated within six months after the decision on suspension.
The bigger issue is whether non-payment today will be considered a default.
A default might force the European Central Bank to withdraw the €89 billion in liquidity assistance it has extended Greek banks, a step that would trigger their collapse. Under the ECB’s bylaws, only solvent countries can be extended such assistance. But the bank relies on rating agencies to determine what is and what isn’t a default, and not paying the IMF is unlikely to meet their definition.
“A missed IMF repayment would not itself constitute a sovereign rating default,” Fitch Ratings wrote in April.
That’s why many analysts don’t anticipate a full default until July 20, when Greece has to make a €3.5 billion payment to the ECB.
While there’s some debate over how the rating agencies would treat non-payment of the Greek bonds the ECB holds, it would be impossible for the central bank to maintain assistance to the country once it failed to make the payment. Doing so would open it to accusations of monetary financing, essentially using its printing press to fund a government, and undermine its credibility.
Many analysts don’t anticipate a full default until July 20.
That doesn’t mean Athens is out of the woods until then.
Under Greece’s bailout program, which also expired Tuesday, a default to the IMF, which took part in the original rescue, gives the eurozone bailout fund the possibility to call for early reimbursement of its loans.
If the European Financial Stability Facility, a temporary crisis resolution mechanism set up by the eurozone, responds by calling for its €164 billion in bonds to be repaid immediately, that could set off a wave of defaults in Greece’s other public and private loans.
But that is unlikely because European governments, already worried they will be blamed for Greece’s collapse, want to avoid any action that could trigger a panic.
Matthew Karnitschnig contributed to this article.