Government officials have repeatedly said they would rather pay wages to the public sector and pensions rather than meet debt payments to third parties if there is not enough money. Although Greece has surprised many with its resilience to fund itself without getting official loans and having access to international capital markets since last August, everybody agrees this cannot go on for much longer. The difficulty in making a large payment to the IMF last week confirmed it. With the economy on a downward path, buying time has become more costly and puts more pressure on Greece.
The country was able to meet a payment of 745 million euros to the IMF on May 12 by drawing on its own Special Drawing Rights (SDR) account at an initial suggestion by the IMF, we are told. Greece reportedly withdrew about 650 million euros from the account and supplemented it with an additional 90 million euros or so to make the payment. Of course, this move does not come without cost. Greece has to pay interest quarterly to the IMF since its SDR holdings have fallen below its allocation.
Nevertheless, this event highlighted that the risk of a default on the IMF is not negligible. The issue may resurface next month if no deal is clinched with the EU. The country is due to pay just over 1.5 billion euros to the IMF in June compared to about 950 million in May. It should be noted that for a country to be formally in default, following a missed payment, the managing director of the IMF would have to notify the Executive Board. This could take up to a month but the notification could come much earlier. In such an event, the IMF will demand that any arrears be paid before it could start lending again.
This would have consequences since the EFSF (European Financial Stability Facility) has the right but not the obligation to activate a provision accelerating the payment of loans. The EFSF has provided loans of about 142 billion euros to Greece so far. Many analysts think this will be a political decision. If the EFSF decides to ask for its money back, the private holders of Greek debt will also be entitled to do the same. However, some credit rating agencies have said that arrears to the IMF do not constitute a rating default but it will be credit negative, leading to the country’s downgrade.
The stance of the ECB will be more critical than the credit agencies. The Eurosystem has become the sole source of liquidity for the Greek economy and indirectly the state by replacing deposits withdrawn by households, companies and public sector entities. Last week, the ECB approved a further 1.1 billion-euro rise in the ELA (Emergency Liquidity Assistance) facility cap to a total of 80 billion euros. This takes the total usage of Eurosystem funding to more than 115 billion euros. It is unknown what position the ECB will take if Greece misses a payment to the IMF next month. Some think the ECB will not cut off the lifeline to the economy if the country is unable to make a payment, arguing the local banks should be eligible for ELA loans to the extent they are solvent.
Of course, everybody wishes such an episode to be avoided but it is a possibility if no compromise between Greece and the EU is reached in the next few weeks. The government insists it will not cross its red lines on pensions and labor issues where the two sides view reforms in a different way. Some object to the IMF-EU reforms on these issues because they feel they go against their ideals and will have a high political cost. They even liken the agreement sought by the EU-IMF to the accord signed in February 1945 in Varkiza, outside Athens, by representatives of the communist rebel forces and the then-government. The accord led to the disarmament of the rebels and is deemed a historic mistake by many in the Left.
In their view, such an agreement with the lenders would discredit the Left and make it just another mainstream party. On the other hand, they feel the Left has the opportunity to dominate Greek politics if the SYRIZA-led government reaches a good agreement. This should not include measures which cross its red lines and it should contain none or fewer austerity measures compared to the packages negotiated by the previous coalition government. This explains why they would rather pay wages and pensions than make debt payments if there is not enough cash. However, this is a phony dilemma since a missed debt payment will likely unleash forces that will make it impossible to pay pensioners and state workers next time around.
The government and the lenders seem to be far apart on a few issues and the signs from the German finance minister are not encouraging. Nevertheless, government officials insist a political solution can be found by end-May. They seem to be pinning their hopes on the European Commission and its president, Jean-Claude Juncker, and the support of German Chancellor Angela Merkel. We hope they are right this time and more so because the economy has stagnated, as evidenced by first-quarter GDP figures, on deteriorating credit conditions and the lack of major economic policy initiatives. After three months of talks, one thing has become clear: Buying time does not lead to a solution. Neither do the tactics of amending, extending and pretending.