Greece is set to miss the deadline on its €1.6 billion loan repayment due to the IMF. The country’s stalemate with its international creditors and the decision to hold a referendum on its bailout offer means Greece will become the first advanced economy to default to the fund in its 71-year history.
Here are nine essential things to know about the default:
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 does distinguish 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 EU 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.
Relations between Syriza and the IMF will not be easy going forward.EPA/Julien Warnand
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.
Author: André Broome, Associate Professor of International Political Economy at University of Warwick
As negotiations go down to the wire, the IMF is once again being cast in the role of dictator. It is the enforcer of controversial structural reforms to a country experiencing severe economic distress, the social consequences of which have been disastrous over the last seven years. In many ways, however, the IMF is used as a scapegoat for promoting unpopular policy choices by the elected politicians and unelected bureaucrats of the eurozone who are well aware of the organisation’s fundamental commitment to favouring fiscal consolidation.
As the June 30 deadline approaches for Greece’s €1.5 billion debt repayment, here are the five key things to know about the IMF’s position.
1. Keeping the eurozone in tact
Keeping the eurozone together is a paramount concern for IMF negotiators. They will therefore almost certainly not recommend that Greece consider taking the nuclear option of abandoning the euro, which would be the likely result of defaulting on its debts.
This is because of the risk of systemic instability. And also because of the potential for eurozone rules to act as an external constraint on future economic policy choices in Greece – which the IMF has long seen as in need of further structural reforms and greater fiscal discipline.
Plus the organisation has a long history of exhibiting a status quo bias whenever it has been faced with the possibility of regional monetary distintegration, such as in the case of the ruble zone during 1991-93.
2. Reputational costs
The IMF is acutely aware of the reputational costs it faces if it is blamed for a sovereign default by Greece – let alone if Greece is eventually forced out of the euro. Here, the stakes involved with the terms of the Greek bailout, and whether or not Greece remains in the euro, differ markedly for the IMF compared with its “Troika” partners, the European Central Bank and the European Commission.
After the IMF took the lead in coordinating a multilateral response to the Asian financial crisis in 1997-98 it shouldered most of the blame for policy mistakes that inflamed the crisis. This motivated many countries to shun the organisation over the next decade until the onset of the global financial crisis in 2008.
The IMF’s Lagarde must take into account other eurozone economies.EPA/Olivier Hoslet
There can be no real winners from the high stakes poker match between Greece, the EU, and the IMF that has been running since the Syriza-led coalition came to power in January. But how the IMF’s reputation fares in the aftermath of the eurozone crisis will have a significant impact on its future crisis management role, both in Europe and beyond.
This is one of the reasons behind the IMF’s decision in 2013 to publicly admit to making notable errors in underestimating the damage that the initial round of austerity policies in 2010-11 would do to the Greek economy. This acknowledgement helped to place a small amount of distance between the IMF’s position and the apparent commitment of EU leaders to austerity-at-any-cost, while reducing the potential for the IMF to be used as the scapegoat for mistakes also made by its Troika partners.
A concern with protecting its reputation is also why the IMF has been at pains to emphasise in press briefings that it has pushed for “social fairness and social balance” in the design of reforms to the Greek pension system.
3. Greece’s commitment to structural reform
How flexible the IMF will be in reaching a compromise with the Greek government depends in large part on how they assess Greece’s commitment to implementing structural economic reforms.
Over the five months since it was elected, the Syriza government has demonstrated little or no political will for implementing major overhauls of the pensions system and the tax system, which are key concerns for the IMF.
A broader issue here is the IMF’s principle of “uniformity of treatment” for borrowers. There will inevitably be internal debates over how much the IMF should compromise with Greece over its bailout terms. But this principle constrains how flexible the organisation can be seen to be for any individual country, to avoid future borrowers also demanding softer loan conditions such as through looser policy targets or a slower pace of structural reforms.
4. Views on tax reform
The IMF’s long-standing views on tax reform also limit its flexibility towards Greece’s recent proposals for tax rises. Here, as in other countries, the IMF is seeking a substantial broadening of the tax base through the expansion and simplification of consumption taxes.
It is concerned that tax increases alone cannot plug the fiscal gap in a country with a notoriously leaky tax system. Though much of Syriza’s proposed changes may increase tax revenue in the short-term, the IMF is more interested in structural reform of the tax system that can help in shaping long-term policy.
In the meantime, cutting public spending in Greece, from the IMF’s perspective, is both easier for the government to achieve as a stopgap solution and is a better indicator for the country’s creditors of the government’s political commitment to implementing painful reforms.
5. Leadership
During the four years that former French finance minister Christine Lagarde has served as the IMF Managing Director, her public comments on Greece have gradually moved towards recognition of the need for debt relief. This is a significant shift from the organisation’s official position in 2010-11, and has expanded the negotiating space available to the IMF. Meanwhile it has placed pressure on its Troika partners to deliver some form of debt relief down the track.
Yet despite growing acknowledgement that debt relief will need to be part of any long-term agreement to achieve fiscal stability in Greece, this is only likely to be formally placed on the negotiating table after the government first agrees to a comprehensive package of structural reforms.
The end game
As the negotiations over Greece’s economic future enter the end game, the chasm between the debtor country and its creditors remains both wide and deep. The carrot of debt relief is only likely to materialise once substantial progress is made on implementing the structural reforms that have been deemed unacceptable by Greece’s Syriza government.
It is hard to imagine how a workable long-term solution can be fudged at this stage of the process. This would need either the creditors relaxing their demands for continued austerity or the government caving in and accepting the structural reforms it campaigned against in the election in January. The former is highly unlikely, given the signal this would send to other economies. The latter seems equally unlikely and if it happens might result in the collapse of the government and fresh elections, starting the messy process of muddling through negotiations all over again.
Author: André Broome, Associate Professor of International Political Economy at University of Warwick
Greece will hold a referendum on July 5 on whether the country should accept the bailout offer of international creditors. The government’s decision to reject what was on offer and call the referendum is ultimately an attempt to take charge of its domestic policy and reaffirm its credibility with voters.
Although Greece is hard strapped for cash this is clearly a political decision with profound consequences for the future of the European Union. It is also the right one.
This is not merely useful as a negotiating tactic for obtaining a better deal with its creditors, as many commentators might suggest. The coalition of the left, Syriza, had no choice but to oppose further measures that would lock its economy into a deflationary spiral, the trappings of which are destroying Greek society.
The Greek position
Elected with the mandate to end the savage austerity policies already imposed, Syriza could hardly accept the further cuts demanded. These include cuts in income support for pensioners below the poverty line and a VAT hike of up to 23% on food staples. Even more onerous was the demand that Greece should deliver a sustained primary budget surplus of 1% for 2016, gradually increasing to 3.5% in the following years when its economy has already been contracting for six years.
By most counts the austerity policies imposed by Greece’s creditors in 2010 in exchange for the bailout money (of €240 billion) have been an abject economic and moral failure. The International Monetary Fund itself has acknowledged “a notable failure” in managing the terms of the first Greek bailout, in setting overly optimistic expectations for the country’s economy and underestimating the effects of the austerity measures it imposed.
Yet in the terms presented to Greece by their creditors there is no commitment to reducing Greece’s crippling debt (which all commentators acknowledge is unrepayable). Nor is there any tangible proposal for rebuilding the Greek economy.
Germany, France, and the EU, aided by the IMF and ECB, continue to insist on implementing policies that have so manifestly failed Greece. They do so to avoid having to justify the massive bailouts of their own financial systems – shifting the burden from banks to taxpayers – if Greece fails to make the repayments. The leading EU partners must not be seen to act leniently towards Greece as this might encourage anti-austerity parties Spain and elsewhere.
Leader of Spain’s anti-austerity party, Podemos, Pablo Iglesias, rallying with Alexis Tsipras.EPA/Orestis Panagiotou
Broken Europe
But the social and political costs of these policies have put the legitimacy of the entire European integration project in question. By being locked into austerity policies, Europe is tearing itself apart.
This brings to the fore the faulty institutional framework that has exacerbated these issues. European integration was conceived by a set of elites, while many EU citizens have never fully embraced the idea: the EU tends to be regarded as an economic entity rather than a cultural or social one. The “ever closer union” remains an aspiration, while EU institutions patch up compromises between its most powerful members.
The ill-thought and haphazard implementation of the common currency is perhaps the most costly compromise of all. The Greek government is therefore right to ask for generous debt relief to allow the economy to have a fresh start in exchange for reforms that will address the perennial problems of corruption and inequality that bedevil Greek society.
The right decision
Greece has many problems – including unfair taxation (64% of taxes are paid by salaried employees and pensioners), corrupt elites who have governed the country for at least four decades with fellow European governments repeatedly turning a blind eye to their flouting of rules, and the oligarch-owned media which are neither independent nor free. But accepting the bailout would only feed into the system that got Greece into this crisis.
Meanwhile, the newcomer to Greek politics, Syriza, has been told it will only receive the funds agreed under the previous bailout terms if it is ready to implement further policies that will decimate the poor and impoverish the middle class even more. Cutting pensions, many of which are already below the eurozone average when almost one in two of them are facing poverty, would be a mistake.
So would conceding to the firing of an additional 150,000 public sector workers when their overall headcount has already been reduced by 161,000 since 2010 – a 19% reduction, according to the IMF.
Contrary to popular belief, the number of public sector employees as a percentage of the workforce in Greece is 14% below the OCED average, but austerity has had an even more disastrous impact on employment in the private sector, with an estimated 400,000 businesses closing down in the past five years.
No country has ever succeeded in emerging from financial crisis by means of austerity. Further austerity would have made the impossibly bad situation that Greece is in worse still. In rejecting the creditors’ further demands, the Greek government stands for the working people of Greece – and Europe too.
Author: Marianna Fotaki, Network Fellow, Edmond J Safra Center for Ethics, Harvard University and Professor of Business Ethics at University of Warwick,
Since our last episode, the crisis in Greece has escalated further. Negotiations between the government and its creditors collapsed over the weekend, and restrictions on bank withdrawals will now follow.
The next step is for the government to issue the equivalent of IOUs to pay salaries and pensions. The country is seemingly on the slippery slope to exiting the euro.
Many of us doubted that it would come to this. In particular, I doubted that it would come to this.
Nearly a decade ago, I analyzed scenarios for a country leaving the eurozone. I concluded that this was exceedingly unlikely to happen. The probability of a Grexit, or any Otherexit, I confidently asserted, was vanishingly small.
My friend and UC Berkeley colleague Brad DeLong regularly reminds us of the need to “mark our views to market.” So where did this prediction go wrong?
Why a euro exit didn’t make sense
My analysis was based on a comparison of economic costs and benefits of a country exiting the euro. The costs, I concluded, would be severe and heavily front-loaded.
Raising the possibility, however remote, of exit from the euro would ignite a bank run in said country. The authorities would be forced to shutter the financial system. Economic activity would grind to a halt. Losing access to not just their savings but also imported petrol, medicines and foodstuffs, angry citizens would take to the streets.
Not only would any subsequent benefits, by comparison, be delayed, but they would be disappointingly small.
With the government printing money to finance its spending, inflation would accelerate, and any improvement in export competitiveness due to depreciation of the newly reintroduced national currency would prove ephemeral.
In Greece’s case, moreover, there is the problem that the country’s leading export, refined petroleum, is priced in dollars and relies on imported oil, which is also priced in dollars. So much for the advantages of a depreciated currency.
Agricultural exports for their part will take several harvests to ramp up. And attracting more tourists won’t be easy against a drumbeat of political unrest.
What went wrong?
How did Greece end up in this pickle? Some say that the specter of a bank run was no longer a deterrent to exit once that bank run started anyway due to the deep depression into which the Greek economy had sunk.
But what is remarkable is how the so-called bank run remained a jog – it was still perfectly manageable until the Greek government called its referendum on the terms of the bail out deal offered by international creditors, negotiations broke down and exit became a real possibility.
Nonperforming loans — ones that are in default or close to it — were already rising, to be sure, but the banks still had all the liquidity they needed. The European Central Bank supported the Greek banking system with emergency liquidity assistance (ELA) right up to the very end of June. Only when Greece stopped negotiating did the Central Bank stop increasing ELA. And only then did a full-fledged bank run break out.
So I stand by the economic argument. Where I need to mark my views to market, however, is for underestimating the role of politics. In particular, I underestimated the extent of political incompetence – not just of the Greek government but even more so of its creditors.
In January Syriza had run on a platform of no more spending cuts or tax increases but also of keeping the euro. It should have anticipated that some compromise would be needed to square this circle. In the event, that realization was strangely late in coming.
And Prime Minister Alexis Tsipras and his government should have had the courage of its convictions. If it was unwilling to accept the creditors’ final offer, then it should have stated its refusal, pure and simple. If it preferred to continue negotiating, then it should have continued negotiating. The decision to call a referendum in midstream only heightened uncertainty. It was a transparent effort to evade responsibility. It was the action of leaders more interested in retaining office than in minimizing the cost to the country of the crisis.
A hard lesson learned
Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF.
The three institutions opposed debt restructuring in 2010 when the crisis still could have been resolved at low cost. They continued to resist it in 2015, when a debt write-down was the obvious concession to Mr Tsipras & Company. The cost would have been small. Pretending instead that Greece’s debts could be repaid hardly enhanced their credibility.
Instead, the creditors first calculated the size of the primary budget surpluses that Greece would have to run in order to hypothetically repay its debt. They then required the government to raise taxes and cut spending sufficiently to produce those surpluses.
They ignored the fact that, in so doing, they consigned the country to an even deeper depression. By privileging their own balance sheets, they got the Greek government and the outcome they deserved.
The implication is clear. Never underestimate the ability of politicians to do the wrong thing. I will try to remember next time.
Author: Barry Eichengreen, Professor of Economics and Political Science at University of California, Berkeley
From The Conversation. Greece is on the brink. Even if a last-minute deal is found it is clear that the solutions proposed are little more than a way to delay the crisis. A more comprehensive resolution of the Greek tragedy needs to address the medium-term (non-)sustainability of the Greek debt position.
Economists know that negotiations usually break down when there is uncertainty in bargaining. When the two sides are uncertain as to what gains and losses the other side can make through any deal or by walking away. In this case, part of the uncertainty is political, because the Greek and other EU governments don’t fully know what might be acceptable to their electorates. But a good part of the uncertainty at this bargaining table is economic. Because we are in totally uncharted waters. Monetary unions can be, and have been, dissolved before in history but, except in the aftermath of wars, not usually in anger.
Uncharted waters
There are several sources of uncertainty for both sides in the dispute.
First, if Greece leaves the Eurozone, at one level it will have greater freedom to walk away from at least some its debt, or to restructure it in a way which suits its short-term economic need. It could plan a moderate primary surplus. The problem for the Greek government is that it will inherit a broken banking system and there will be great uncertainty on whether a devaluing new Drachma could benefit its net trade position, with an impaired financial system, and shut out from world capital markets. Greece is not Iceland, and there is less social consensus on how to share the short-run burden of economic adjustment in a Grexit scenario.
Second, the losses for the EU lenders are truly eye-watering. The two bail-out packages for Greece amount to €215.8 billion. Of these €183.8 billion came from other EU countries and the rest from the IMF. The biggest shares of the support through the European Financial Stability Facility came from Germany and France. None of this includes the cost of support given to the Greek banking system via the ECB. The IMF would suffer considerable losses too (the UK’s main exposure is through this channel). The impact of Grexit and a partial or full debt repudiation on the rest of the EU would be considerable. Paradoxically by triggering a Grexit rather than an orderly debt restructure, the EU lenders may lose more of their current bail-out. So why are they not more accommodating? Because if it stays in, Greece will need a further bail-out, as no-one believes the current plan is sustainable. It’s that uncertainty again.
Third, no-one can really estimate the contagion effect of a seemingly irreversible monetary union breaking up. A major jump in borrowing costs for countries like Italy and Spain would hit these countries hard, and potentially create a domino effect. If Grexit happens, the Eurozone needs rapid reform to ensure a guarantee of greater mutualisation of fiscal policy. Is that likely to be acceptable to northern EU members? Nobody knows for sure, but it seems unlikely.
The computer gets it
In the 1980s movie War Games, the computer in charge of the US nuclear arsenal realises, by constantly repeating the game of noughts and crosses (which cannot be won if both players play rationally), that nuclear war is unwinnable. The problem with all this uncertainty is that the various players in the Grexit game fail to properly understand the serious consequences of not reaching a rational deal. They still think they can win. That’s not to say that keeping Greece in the Euro is the best option in the long term. But a breakdown in negotiations and a disorderly exit doesn’t appear desirable.
Author: Anton Muscatelli, Principal and Vice Chancellor at University of Glasgow
From The Conversation. The Greek government and its international creditors remain at an impasse over the reforms Greece must accept to receive the bail-out it needs to sustain itself in the coming months. The decision to postpone its June 5 IMF debt repayment and reject a set of reforms put forward by the EU Commission president, Jean-Claude Juncker has sparked debate about Greece’s ability to honour its commitments to international creditors.
The back-and-forth exchange of proposals continues, with the Greek prime minister, Alexis Tsipras – now a regular fixture in Brussels – meeting his French and German counterparts today. The need to agree becomes increasingly important for both Greece and the eurozone as the days pass. The current bail-out deal runs out at the end of June and without the further €7.2 billion from the EU and IMF, the Greek government runs the risk of not being able to sustain itself.
Though time is running out, I believe they will eventually strike an agreement. What it will look like, however, is rather opaque. In light of Syriza’s tactics so far and the weakness of Greece’s position, the need to accept what its creditors are offering is increasingly the only solution.
Punching above its weight
When Syriza came to power last January, it promised to deviate from the path of austerity and renegotiate the bail-out programme. It was truly punching above its weight. But in the context of the Greek population having suffered prolonged periods of austerity with no real signs of recovery, it rode the spirit of populism and promised that it could deliver an alternative programme.
A proposition that scrapped austerity, however, has not come to fruition. In fact, the Greek government has not been able to implement large sections of its electoral agenda – mainly due to a lack of funds, but also because the new government needed breathing space as new and inexperienced political actors came to the forefront.
Ultimately, amateur handling of domestic policies and international negotiations by prominent government ministers, such as the finance minister, Yanis Varoufakis, and the foreign minister, Nikolaos Kotzias, internal disagreement over where to focus their precious few resources and an over-reliance on the perceived charisma of Alexis Tsipras have left the government with little to show for its efforts so far.
Charisma can only get you so far.EPA/Yannis Kolesidis
Negotiations with creditors have not managed to turn European partners in favour of the Greek government’s positions. Instead the episode has demonstrated a further demise of the country’s already tarnished image as an unreliable and stubborn partner. Recent statements by high-level EU officials demonstrate well the frustration over the inability of the Greek government to deliver concrete and realistic solutions.
Political game playing
So where does this state of play leave the Greek government? As time is running out and the country’s economic position deteriorates, it is expected that the range of available alternative measures will diminish. Some of the reforms Syriza is proposing on pensions and privatisation require significant time to implement and yield the necessary economic results. Greece does not have that luxury.
There is a strong game of political communication taking place in front of the general public. Not only is Syriza trying to hold together its political mandate and appease a Greek electorate which vested its hopes in the party, but it is also up against internal opposition within the Greek parliament. This has become progressively louder and more visible – arguing for example in favour of a referendum of the proposed agreement with the EU.
Greeks are hoping for a speedy resolution.EPA/Orestis Panagiotou
Nevertheless, the Greek government under Syriza has not received a mandate from its electorate to take the country out of the eurozone. Thus, Syriza is not expected to go head to head with the EU on a full rupture of relations, something it will become extremely difficult to justify domestically.
Meanwhile Europe is trying to hold firm and press Greece to meet its bail-out obligations – to maintain the cohesion of the eurozone and protect the rest of the EU. At the same time, leaders (including Angela Merkel and Francois Hollande) also need to justify their decisions to their own domestic electorates, who are becoming increasingly uneasy.
For all the anxiety, the solution is crystal clear. In order for Greece to move forward, the Greek government needs to take up the opportunity being offered it, accept the political cost domestically and help return the international dignity and standing of the country.
Author Theofanis Exadaktylos Lecturer in European Politics at University of Surrey
