July 20 installment to be the catalyst

The political and economic landscape in Greece will not be the same after the referendum, no matter what the outcome. It is hard to predict how it will look since the country has entered into unchartered waters but it is reasonable to expect turbulence ahead. Nevertheless, the key date to watch remains July 20, when Greece has to pay 3.49 billion euros to the Eurosystem.  

The result of the referendum was not known at the time of writing, with many voters still undecided although the “no” vote appeared to have an edge. Pundits suggested an agreement with the lenders, if any, would be more difficult and time-consuming to reach if the “no” vote prevailed compared to the “yes” vote. On the other hand, the government had campaigned on the premise a “no” vote would strengthen its negotiating position and pave the way for a better deal than the previous one offered by the lenders. It is reminded the Greek government also promised to raise an extra 8 billion euros over the next two years under a proposal submitted to the country’s creditors in the last week of June.

Greece is undoubtedly at a crossroads. The adjustment program expired at the end of last month and Athens is in arrears to the International Monetary Fund after failing to repay about 1.5 billion euros due to the IMF under the standby arrangement on June 30. According to the Fund, 19 countries failed to repay and went into arrears between 1978 and 1989 and all but Sudan and Somalia were able to clear their overdue balances, by working with the IMF. Zimbabwe was the only country with protracted arrears in the more recent past. 

It is reminded Greece was the recipient of IMF loans under a standby arrangement in 2010-11 and under an extended arrangement to support the adjustment program from 2012 onward.

The country’s outstanding obligations to the IMF amount to 21.2 billion euros at this point according to the Fund. Greece also owes about 130 billion to the European Financial Stability Facility (EFSF) with the average maturity of these loans estimated at around 32 years and the last payment due in 2053. It also has to repay 52.9 billion euros to eurozone members. These are bilateral loans pooled by the European Commission and provided to Greece under the Greek Loan Facility (GLF) in 2010-11. The country will also have to roll over short-term T-bills amounting to about 15 billion euros. About 2 billion euros of T-bills will have to be rolled over on July 10.

In addition, the country owes about 27 billion euros to the ECB and euro-area central banks which own Greek bonds. Greece has to repay 6.6 billion euros this year. Even before getting there, the state will have to make interest payments of 16.4 million euros on July 17, 225.1 million on July 19 and 381.3 million on July 20: about 623 million euros in total within a few days. 

The big payment of 3.49 billion euros is due to the Eurosystem on July 20. The amount is split between the ECB at about 2.1 billion euros and the national central banks at about 1.36 billion. The other payment of about 3.2 billion euros will have to be made to the ECB on August 20. It is known that some radicals in the government have called this “odious debt” on the grounds that the purchases of Greek bonds were aimed at helping the banks of core eurozone countries and not the Greeks.

A few analysts have argued in the past that it is easier for Greece to default on payments to the ECB than to satisfy demands that have a high political cost domestically. Credit Suisse has noted in a report in the past, “The incentives for the Greek government to spend political capital getting the money in order to pay it back to the ECB are limited to the cost that would be avoided by not defaulting to the ECB.”

It should be noted, though, that failure to pay the ECB is a default event under the Financial Assistance Facility (FAF). However, the FAF has to be accelerated for the event to be transmitted to other forms of debt. In the meantime, Greece’s official default to the IMF, it is now in arrears, would trigger cross-default of the FAF. If the latter is accelerated, the PSI bonds will be in default after a 30-day grace period, analysts say. The situation is very complicated.

It becomes more so if one includes the ECB’s dilemma about capping or/and even removing the emergency liquidity assistance (ELA), which has kept the Greek banking system operational for months. The ECB has said the banks have to be solvent and have enough eligible collateral to get ELA loans. It has to decide how the Greek state’s default status affects the solvency of the local banks which have passed the AQR/stress tests.

With capital controls in place and tax collection coming to a standstill, it is impossible for Greece to honor its obligations without a new loan from the EU. This will not be possible without an agreement on a new reform package but this requires time to be worked out. Some pundits say a bridge loan could be provided on the condition prospects for an agreement look good.

However, they caution this will be much more difficult to achieve if the “no” vote wins. Still, the large payment to the ECB on July 20 could be a catalyst for an agreement because the stakes are too high and a number of legal and moral issues have to be dealt with.