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Greece’s IMF trick takes it to the doorstep of default

Alexis Tsipras, Greece's prime minister, smiles as he arrives at his office after returning from Brussels meetings in Athens, Greece, on Thursday, June 4, 2015. After meeting in Brussels with European Commission President Jean-Claude Juncker and Dutch Finance Minister Jeroen Dijsselbloem, who also heads the group of his euro-area counterparts, Tsipras stuck to his position that any basis for an accord must be a Greek proposal. Photographer: Kostas Tsironis/Bloomberg *** Local Caption *** Alexis TsiprasAlexis Tsipras, Greece's prime minister, smiles as he arrives at his office after returning from Brussels meetings in Athens, Greece, on Thursday, June 4, 2015. After meeting in Brussels with European Commission President Jean-Claude Juncker and Dutch Finance Minister Jeroen Dijsselbloem, who also heads the group of his euro-area counterparts, Tsipras stuck to his position that any basis for an accord must be a Greek proposal. Photographer: Kostas Tsironis/Bloomberg *** Local Caption *** Alexis Tsipras
Alexis Tsipras, Greece's prime minister, smiles as he arrives at his office after returning from meeting in Brussels with European Commission President Jean-Claude Juncker.Kostas Tsironis © 2015 Bloomberg Finance LP

After the #ultimatumnotultimatum earlier this week from its creditors, Greece is experimenting today with #defaultnotdefault.

The country has become the first developed economy in history to miss a scheduled payment to the International Monetary Fund, having invoked some small print in the IMF’s articles that allows it to bundle four payments due this month in a single, $1.8 billion instalment.

“This looks like a thinly-veiled threat to default at the end of the month if an agreement isn’t reached and illustrates the chasm that appears still to be bridged between the two sides’ respective positions,” James Nixon, chief European economist at Oxford Economics, said Friday.

Financial markets reacted accordingly. The yields on the government’s two-year debt, which would be most sensitive to a fresh default, shot up to 24.5% from 22.3%, while bank stocks tanked by between 9% and 14%.

The assumption is that, by the end of the month the country will have unlocked the remaining €7.2 billion in its bailout program by striking some kind of deal with the IMF, the Eurozone and the European Central Bank.

Judging by leaks out of the Brussels media Friday, that assumption is somewhere between “reckless” and “heroic”. After four months of grandstanding, prevaricating and backbiting, the two sides are barely any closer to an agreement: the latest proposal from the creditors still assumes that Greece can repay its debts in full, while the latest Greek counter-proposals still assume that the Eurozone will happily write off billions of euros in loans AND continue funding the country without meaningful reform of its dysfunctional labor market and pension system. Optimists point out that the two sides are now only €700 million apart on what they think Greece’s budget surplus (ex-debt servicing) should be this year (the creditors want 1% of GDP while Athens is offering 0.6%). But the reality is that the country is already more likely to run a primary deficit after slipping back into recession.

The Greek proposals, presented Thursday by Prime Minister Alexis Tsipras, have the look of one last act of defiance to convince the hardliners in his left-wing Syriza party that he’s done everything possible to keep his election promises. The more he edges towards a compromise, the more he risks failing to get it through parliament. Over a third of Syriza’s deputies voted in a non-binding party meeting last month for a complete rupture with the creditors, and Tsipras’ cabinet Thursday overwhelmingly rejected the latest positions as too burdensome.

“The government will not go back on the promises we made to the Greek people, AP quoted Health Minister Panagiotis Kourouplis as saying to Antenna television. “Let the Europeans assume the responsibility if there is a split with lenders.”

Tsipras is due to take up the balancing act later Friday with an evening address to the Greek parliament.

Athens got some moral support from the international community Friday with a long list of economists, led by Nobel Prize winner Joseph Stiglitz and author Thomas Piketty writing in an open letter in the Financial Times that “it is wrong to ask Greece to commit itself to an old program that has demonstrably failed, been rejected by Greek voters, and which large numbers of economists believe was misguided from the start.”

Greece's debt (red) and GDP (blue) since 2007.
Greece’s GDP (blue) is shrinking faster than its debts (red) Source: S&P
Standard & Poor's

 

There was also a hint of movement from a more surprising direction. The German newspaper Bild reported that Germany’s hawkish finance minister Wolfgang Schäuble was considering resignation over differences with his boss, Angela Merkel, who reportedly places more importance on keeping Greece in the Eurozone. The Finance Ministry denied the report. But either way, it will take more than the removal of one minister to build enough political support across 18 other countries for giving Greece even more time and money.