As expected, Greece missed its payment deadline on June 30 to the IMF. Just hours before the midnight expiry date was reached, Eurogroup leaders at an emergency conference failed to reach a deal to help the country pay the €1.5bn it owes, and a last minute proposal from Greek prime minister Alexis Tsipras for a third bailout was rejected.
Officially, Greece is now “in arrears” to the IMF. In a press release, Gerry Rice, Director of Communications said: “I confirm that the SDR 1.2bn repayment (about €1.5bn) due by Greece to the IMF today has not been received. We have informed our Executive Board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared.”
Greece is the first advanced economy to fail to honour debts to the IMF
While the chosen word by the IMF is “in arrears,” with Rice saying last week that official communications would not use the word “default,” by failing to make its debt payments the country has effectively defaulted. Greece is the first advanced economy to fail to honour debts to the IMF, joining countries such as Somalia and Zimbabwe.
A last minute request for a postponement was requested by Athens, which was noted by the IMF to be reviewed by the “Executive Board in due course.” According to the Financial Times, “The board could, if countries holding 70 percent of voting rights decide to do so, offer Greece some respite on grounds of ‘exceptional hardship’. But that is seen as highly unlikely.”
By defaulting on its debts, Greece is no longer eligible for IMF aid, with no comment yet on when it expects Greece to repay its debts. As the world’s lender of last resort, being cut off from IMF aid means the loss of a vital safety net. As Apostolos Gkoutzinis, a partner in London with the New York law firm Shearman & Sterling and the head of the firm’s European capital markets group said, speaking to the New York Times, “Without that backstop, Greece might not even be able to import essential goods like medicines and petrol in the future.”
Greece’s exit from the euro, however, is not yet sealed. On his personal blog in 2012, Greek finance minister Yanis Varoufakis made the case that a default does not necessarily mean Greece no longer using the euro, claiming, “Greece must default within the eurozone.” The minister seems to be sticking to this line, saying lately that there is no legal precedent for a eurozone exit and that the planned referendum on July 5 was not about leaving the euro.
European officials are not yet considering this default as the beginning of the end for Greece’s position in the eurozone. As the FT reports, “Credit rating agencies and EU bailout lenders have signalled they will not consider non-payment a ‘credit event’ that triggers other defaults — something that would bankrupt Athens immediately.” Greece is poised to make further payments to the European Central Bank on July 30. Should it also fail to honour these debts, then its future in – or rather out of – the eurozone would be sealed, with Chris Morris, the BBC’s European Correspondent noting “that would probably be the end.” Likewise, the referendum on new bailout conditions in Greece is to be held on July 5 – which many see as a referendum on Greeks accepting or rejecting a future in the euro – will also have a greater impact on eurozone membership.
Four of the world’s worst sovereign defaults since 2000
1. 2008, Ecuador, $3.2bn: A $31m interest payment pushed the country over the edge seven years ago – and it was forced to default. The default felt unnecessary to many because the country had enough oil money to deliver the interest. Yet politicians had decided against such a route. Last year Ecuador sold $2bn worth of 10-year bonds to return to the international capital markets.
2. 2010, Jamaica, $7.9bn: Jamaica’s staggering debt problem was blamed for its default. Unfortunately, the government was so focused on making interest payments that it neglected public investment and social spending, throwing the economy into turmoil.
3. 2014, Argentina, $1.3bn: For the second time in 13 years Argentina had to default on its debt, when last-minute talks in New York with bond-holders failed. ‘Vulture fund’ investors had been demanding $1.3bn from the country.
4. 2015, Greece, $1.7bn: Last minute efforts by Alexis Tsipras have seen Greece default on the repayment it owes to the IMF. This renders the country unable to call on the IMF for aid in the future.