Why It Won’t Be a Default If Greece Misses Next IMF PaymentAndrew Mayeda
If Greece fails to pay the $1.7 billion it owes the International Monetary Fund on Tuesday, it might be worse for the lender than for Greece.
There’s a difference between missing a payment to bond investors, and to an official institution such as the IMF. Under the fund’s policy, countries that miss payments are deemed to be in “arrears.” The Washington-based lender plans to stick to that language, rather than using the term “default,” IMF spokesman Gerry Rice said Thursday. The fund still expects Greece to make the payment, he said.
The three major credit-rating companies have also said failure to pay the IMF wouldn’t constitute a formal default. So while the practical consequences for Greece may be temporary and small as long as the nation remains in talks with creditors for an accord, the blow to the IMF’s reputation as the world’s lender of last resort could be longer-lasting, making it tougher for the fund to win support for some future bailouts.
“There’s going to be severe scrutiny of interventions in countries that can either be considered wealthy in their own right or are part of a larger geo-economic structure like the euro zone,” Benn Steil, director of international economics at the Council on Foreign Relations in New York.
The lack of a deal has increased the risk Greece will fail to make the June 30 payment and have to impose capital controls, Fitch Ratings said in a research note Friday. While a missed payment won’t be a sovereign default, it would be “credit negative,” the rating firm said.
“Arrears to the IMF by a high-income economy are unprecedented and would indicate extreme liquidity stress,” Fitch said in the note.
Non-payment would land Greece in a club of countries in arrears that currently includes Zimbabwe, Sudan and Somalia. The three nations have combined overdue payments of about $1.8 billion.
The bottom line is that a missed IMF payment probably won’t trigger a wave of defaults on other loans provided by the country’s other official creditors or debt held by private investors. “Non-payment of the IMF is unlikely to cause a catastrophic cascade of other liabilities,” said Zoso Davies, a credit strategist at Barclays Plc in London.
Once in arrears, Greece may have little incentive to pay back the fund, Steil said. The $26 billion to be repaid by Greece is almost four times the total of overdue funds in the IMF’s history, he said in a blog post Wednesday. Greece’s payment schedule currently runs through 2030.
Klaus Regling, head of the euro-area states’ crisis fund that supports Greece, said last week that it has the option to accelerate Greece’s payment schedule if it falls into arrears with the IMF. But if there’s still hope for a deal with Greece’s creditors, it’s hard to imagine Regling pushing the nation into default.
Kathrin Muehlbronner, senior credit officer at Moody’s Investors Service in London, said the firm defines default as payments missed on bonds held by private-sector investors.
Of greater concern is the 3.5 billion-euro ($3.9 billion) bond held by the European Central Bank that matures July 20, said Alberto Gallo, a credit analyst with Royal Bank of Scotland Group Plc in London. “With a missed payment to the ECB, it would probably freeze emergency liquidity to Greek banks,” he said.
A Greece in arrears to the IMF would further undermine the institution’s credibility among emerging markets such as China and India, especially after the IMF invested so much in keeping the country afloat, Steil said.
A missed payment to the IMF could also still cause confusion. The fund has an elaborate, drawn-out process for dealing with countries that fall into arrears.
Once a nation misses a payment, IMF staff sends a cable to the country urging it to pay up “promptly,” according to a 2012 review of the fund’s strategy on overdue payments. The nation is also ineligible for further bailout money until the arrears are cleared.
Two weeks after a missed payment, management contacts the country’s IMF governor -- usually the central bank chief or finance minister -- to stress the seriousness of the matter and urge “full and prompt settlement.”
One month in, Managing Director Christine Lagarde notifies the fund’s executive board that the payment has been missed. After three months, the fund posts a “brief factual statement” noting the arrears on its public website.
Within two years after a missed payment, the fund could initiate plans to force Greece out of the IMF’s membership.
“The procedures are designed in some sense to not immediately lock the door and throw away the key. It’s a very slow-motion process,” said Edwin Truman, a former U.S. Treasury official who is now a senior fellow at the Peterson Institute for International Economics in Washington. “It dates back to a world where financial markets didn’t work second by second.”
Recently, the IMF has been confirming to news organizations that it received payments from Greece on the same day the money was due. Rice, the spokesman, told reporters Thursday in Washington that Lagarde would probably notify the executive board promptly if Greece misses a payment, given the high visibility of the case, rather than waiting a month.
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