Greece hits crunch time over €750m repayment to IMF

10/5/2015

By Shawn Donnan

Monday’s meeting of Eurogroup ministers in Brussels may or may not turn out to be a make or break moment for Greece and the eurozone. There is no doubt that moment is creeping closer, however, or that the International Monetary Fund and the billions it is due to be repaid by Athens this year alone will play a central role in what happens next. Whether a deal is concluded in Brussels or not, Athens owes the IMF €750m on Tuesday.

The money is part of a repayment plan set five years ago as part of a 2010 bailout and the IMF is unyielding about that schedule. One way or another it must be repaid and be repaid on time. No advanced economy has ever defaulted on the 70-year-old IMF, which acts as a lender of last resort to its 188 member governments.

Here are a few things you need to know in the run-up to Tuesday’s deadline:

Greece’s repayment schedule to the IMF is toughest in the weeks ahead ...

Cancel the summer holidays. Tuesday’s €750m repayment is the biggest that the Greek government has had to make to the IMF so far this year. But it is really just the start of a difficult few months that make it likely that Greece and its creditors are going to have a long hot summer high on brinkmanship and stress, and short on fun.

The immediate discussions are over releasing another €7.2bn from a European-led bailout. Greece owes more than that to the IMF and other creditors in the months to come.

In June alone, Greece owes another €1.5bn to the IMF and it is due to repay the same sum across four payments in September. Meanwhile, it owes some €3bn to the European Central Bank in July and August.

Given its current cash struggles it is unlikely to make all of those payments without receiving at least some of the bailout funds.

Missing a payment to the IMF is not something that happens often ...

Were Greece to miss its payment it would not be the first time in the fund’s history that had happened. In the 1980s, as many as 25 countries a year missed payments to the fund.

But that figure has come down substantially in more recent years. A 2012 review identified just Somalia, Sudan and Zimbabwe as being more than six months past due to the IMF, although four other countries missed payments they were able to repay within less than two weeks.

The biggest issue with Greece is scale. It is by far the IMF’s biggest debtor and that means the consequences of Athens missing payments could be enormous. At the end of March, the IMF said only €1.6bn from its members was more than six months in arrears.

Greece has drawn down almost €35bn from the IMF in two separate bailouts over the past five years. It is due to pay back €6.9bn over the rest of this year alone.

The IMF’s credibility would take a blow if Greece stopped paying it back ...

The story of the IMF’s involvement in Greece has not been a happy one. Even before the current leftwing populist government took office it wasn’t hard to find senior officials at the IMF who would grumble about the Greek programme. Past internal reviews have identified plenty of mistakes in the first, 2010 bailout and the fund’s entire response to the eurozone crisis, including Greece, is now being examined again by the IMF’s internal watchdog.

But the programme has also been criticised for what some emerging nations argue was the special treatment that Greece received as a European economy rather than a developing one that the fund could push around.

At a time when the place in the global economy of the IMF and the World Bank are being challenged by new institutions such as the Asian Infrastructure Investment Bank, backed by China, India and other big emerging economies, the case of Greece is an even more sensitive one.

“If there is a failure in the Greek case this to me will have a big impact on the credibility of the IMF,” says Andrea Montanino, a former IMF board member who now is at the Atlantic Council in Washington. “If Greece fails people will start questioning whether IMF policies really work . . . It is absolutely in the interest of the IMF that this does not happen.”

There may be a little wiggle room. Very little ...

When Greece tested the waters earlier this year to see if it might be possible to reschedule some of its debt to the IMF, Christine Lagarde and the rest of the IMF’s leadership held the line. The IMF’s rules are not there to be broken. It also has a strict prohibition on lending to members in arrears and countries that miss a payment immediately lose access to IMF resources.

But that hard line masks a little wiggle room created by the IMF’s own procedures. Under the official timeline plan, it is not until a month after a missed payment that the managing director formally notifies the board and not until three months afterwards that a formal statement to the outside world is expected to be made.

Those kind of delays may matter to Greece and allow it to play the system as it negotiates with its creditors. Credit rating agencies have already said they would not immediately consider a missed payment to the IMF the trigger for a default. Moreover, Greece’s master agreement with the European Financial Stability Facility, the vehicle for its bailout from fellow EU members, specifically mentions the IMF managing director’s notification of the board, which would come a month after any errant payment, as the trigger for a default rather than the missed deadline itself.

Viewed one way, that means a missed payment from Greece could act as a way to “focus minds” in the negotiating room, says Nicolas Véron, a French economist now at the Peterson Institute for International Economics in Washington.

Then again those are all technicalities. The markets and what Greek people think are what really matters ...

Greece is already frozen out of international capital markets. That’s why the IMF is there. But that does not mean that the markets do not matter. Their reaction the day after any missed payment will hold the real key.

“The whole world is looking at what Greece will do on May 12,” says Mr Montanino. “This is not about technicalities. This is about market reaction.”

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