Greece to fall into IMF 'arrears'

Normally, the debtor country would inform the IMF the day before that it had lodged a payment order at its central bank and the money would be transferred in 24 hours.

Instead, a Greek official told the Reuters news agency on Monday the money isn’t coming.

The non-payment will, in technical terms, put Greece in IMF “arrears” rather than in “default”.

It means it won’t be eligible for IMF aid until the bill is paid and the IMF will send it warning letters from time to time.

If it still doesn’t pay after two years or so, it will fall into “protracted arrears”, joining Somalia, Sudan, and Zimbabwe, and its IMF voting rights could be suspended.

The institutions which use the nomenclature “default” are the major ratings agencies, the US-based firms Fitch, Moody’s, and S&P.

They’ve already said they’ll declare Greece to be in “default” only if if fails to pay back private sector debts, not public ones.

Greece’s next private sector repayment is €143 million of Japanese-denominated debt on 14 July, the financial newswire, Bloomberg, says.

Its ability to honour it, and any other payments, will depend on the European Central Bank (ECB).

ECB

The ECB is keeping Greece and its banks afloat using Emergency Liquidity Assistance (ELA).

It means Greek banks borrow money from the ECB on a daily basis using Greek government bonds, or “t-bills”, as collateral.

The ECB has already imposed a 35 percent or so risk premium, or "haircut", on most t-bills, meaning that for every €135 of collateral the banks give, they get €100 in cash in return.

But if the ECB board decides the t-bills are worthless because Greece didn’t pay the IMF, it’ll stop.

If it raises the haircut, Greek banks might not be able to bear it.

An official with knowledge of IMF and ECB procedure told EUobserver on Monday: “The ECB board is talking about this on a daily basis: ‘How much in t-bills do we accept? What kind of haircut do we apply?’.”

“The key question is what does the ECB make of the IMF arrears? If it decides the t-bills are worthless as collateral, then the Greek banks will become insolvent and the ECB, as a single supervisor, would be forced to close them down”.

The official noted the ECB has “no precedent” for the current situation.

He added, on the ECB’s thinking: “How can Greece be trusted to pay back less-preferred creditors if it doesn’t pay back it’s preferred creditor [the IMF]?”.

Merry-go-round

A contact at a leading German bank, who asked not to be named, noted that the ECB decision is also linked to private sector repayments, in what amounts to a merry-go-round of decision-making.

If Greece doesn’t pay back a private bond and ratings agencies say it’s in “default”, the ECB is also obliged to stop ELA.

The €143mn Japanese bond was bought in 1995.

The German bank contact noted that, due to Greece’s years-old problems, it “holds relatively few private bonds at this time”.

But he added: “It would be better for them to pay back whatever they do hold”.

Referendum

For its part, Austria’s Raiffeisen Bank noted that the Greek referendum, on 5 July, adds more risk.

It said on Monday that if Greek voters say No to creditors’ terms, the ECB’s first reaction is likely to increase the haircut.

It’s next step would be to insist Greece repays €3.5 billion of t-bills due on 20 July. But with no bailout, it couldn’t do so, the ELA would stop, and Greece would go bust.

Raiffeisen said the ECB could, in theory, recapitalise Greek banks. But with a referendum No and with the far-left Syriza party in power “it remains only a theoretical option”.

“Consequently, Greece would be forced to independently carry out recapitalisation of banks with a new currency - which is equal to exit from the monetary union”.

Best case

The Austrian bank said even a Yes poses difficulties.

It said it would mean new elections due to Syriza’s “massive loss of credbility”.

The shortest delay between new elections and a new government is 30 days. But it’s fanciful to imagine that a new, pro-creditor coalition could form so quickly.

In the meantime, Greece would have to maintain capital controls.

It would also have to pay ECB t-bills, other IMF debt tranches, and pensions and public sector wages in what Raiffeisen called “a parallel currency” or “IOUs”.

The official with knowledge of IMF and ECB procedures noted that good will goes a long way, however.

With Greece in IMF “arrears”, the IMF cannot take part in a new bailout which Greece would need to pay back the arrears, creating a Catch-22.

But the official said a saviour country could give Greece a bilateral “bridging loan”, lasting just a few days, to pay the arrears, and Greece could then use the new bailout to pay back the loan.

He said the US already did it for Peru in the 1990s.