Greece defaults on IMF payment despite last-minute overtures to creditors

Mangalore Today News Network

Athens, Greece, July 01, 2015: The International Monetary Fund said shortly after midnight on Wednesday that Greece had missed a crucial debt payment to the fund, deepening a sense of crisis that has haunted world leaders and financial markets over the past week.

"We have informed our executive board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared," Gerry Rice, a spokesman for the fund, said.

The development came as Greece’s European creditors each separately rejected an 11th-hour attempt by Athens to extend the country’s international bailout program.

Greece is not technically in default, but missing the payment of 1.5 billion euros, or about $1.7 billion, is yet another unmistakable warning that the country will probably be unable to meet its other obligations in coming weeks, to its bond holders and to the European Central Bank. That might make the bank, one of the country’s chief creditors, less willing to continue emergency loans that have been propping up Greek banks for the past several months.

By declaring Greece in arrears, the IMF avoided using the term "default." Credit rating agencies also will not consider Greece in default based on missing the IMF payment, because the IMF is not considered a commercial borrower.

But the ratings agency Standard & Poor’s said in a statement on Tuesday that it would designate Greece as in default if the country could not make payments to private creditors, like 2 billion euros in Greek Treasury bills that are due on July 10. (The IMF declined to comment on whether it expected Greece to make the payment it just missed sometime in the future.)

With just hours to go before the deadline for the payment, the Greek prime minister, Alexis Tsipras, had asked the other nations that use the euro to provide another bailout that would buy Athens time to renegotiate its crippling debt load.

Finance ministers of those countries discussed the proposal on Tuesday night and left open the possibility that Greece could eventually win a new aid package, but dashed any hopes Athens had for immediate action. Chancellor Angela Merkel of Germany had said earlier in the day that no deal with Tsipras’ government could be negotiated until after a referendum on Sunday in which Greeks will be asked to accept or reject an offer made last week by Greece’s creditors.

Greece now joins the roster of countries - including some of the poorest and worst governed - that have missed payments to the IMF. Also on that list: Zimbabwe, Sudan and Somalia.

Greece becomes the first developed country to miss a payment, and it was the largest missed payment in the fund’s history. Sudan still owes about $1.4 billion from loans acquired in the 1980s, according to the fund.

Other countries that have fallen behind more recently include Iraq, Bosnia and Afghanistan. All three eventually settled their obligations to the fund.

Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said delinquency would put Greece in ignoble company.

"They are joining countries we would normally regard as failed and failing states," Kirkegaard said. "The symbolism is quite dramatic."

Jeroen Dijsselbloem, the head of the Eurogroup of finance ministers, said late Tuesday night that Greece was effectively in default and could now face even tougher conditions for a new aid package.

"I think the fact of the matter is that Greece is in default or will be in default tomorrow morning on the IMF and also, I believe, on a loan to their own central bank," Dijsselbloem told CNBC. "But they will be in default, and I don’t think I can alter that in the short term."

Tsipras on Tuesday requested more aid from the European bailout fund, the European Stability Mechanism, but a new program would require a number of procedural steps and raise significant new challenges for Greece.

"Any talks about a future program will have to be discussed in the Eurogroup" and "will have to be assessed by the institutions," Dijsselbloem said.

He was referring to the three institutions - the European Commission, the IMF and the European Central Bank - that oversee Greece’s compliance with the terms of the two giant bailouts it has been granted in the last five years.

The IMF has not granted a request to delay repayment since the 1980s, making it highly unlikely that Greece would be given different treatment. The change of policy came about because the fund determined that giving extensions to countries that fell into arrears did not produce benefits for those countries.

The IMF still would take into account the request by the Athens government for an extension. But any final decision is likely to take several weeks.

The confirmation of the missed payment came after top European Union officials outlined another offer to Tsipras on Monday night, which suggested that both sides were interested in defusing a crisis that has left Greece financially crippled and at risk of becoming the first nation to leave the euro currency union.

France and the United States, among other nations, have been pressing for a compromise that could avert the risk of Greece’s problems spreading to other countries and reduce the strain on European unity.

With the nation’s banks shut down and his government confronting intensifying financial strains, Tsipras’ office released a statement on Tuesday afternoon confirming that the government had proposed a new bailout from a different pot of money than the one drawn on so far.

The statement was vague, noting that Greece had applied for a two-year agreement for new loans from the European Stability Mechanism. The statement said that the aim was to help the country meet its debt obligations and that Greece’s intention was to remain in the eurozone.

The lack of specificity in the statement made it unclear whether it was just a repackaging of previous requests - already rejected in Brussels, the base of the European Union - or if the prime minister had offered new proposals.

Hours earlier, Tsipras spoke by telephone with Jean-Claude Juncker, president of the European Commission, Mario Draghi, chief of the European Central Bank, and Martin Schulz, president of the European Parliament. And within the Greek government, competing voices were debating how to proceed, analysts said.

"What is certain is that there is a lot of pressure inside the government," said George Pagoulatos, a political analyst in Athens. "There are some people there who realize the huge risks in the path the country is on."

Negotiations have been going on for months, as Greece sought to unlock a frozen 7.2 billion euro bailout payment and complete a new comprehensive agreement that would include more funding and major debt relief. But the talks broke down last weekend, after Tsipras unexpectedly announced that a "yes or no" national referendum would be held so that voters could decide whether to accept the terms proposed by creditors, which he found onerous.

Tsipras has called on voters to choose "no" and has denied that the referendum is the equivalent of choosing whether to leave Europe’s currency union, something that most Greeks do not want to do.

Pro-Europe demonstrators massed in Syntagma Square in Athens outside Parliament on Tuesday night despite drizzle, thunder and lightning. As speakers began shouting, "Vote yes to Europe," the demonstrators shouted and blew whistles. Some waved Greek flags, others red flags bearing the words "YES to Europe. YES to the Euro."

Alexandros Limniatis, 67, who retired from the telephone company OTE, said he had been frustrated with the governing Syriza party since it took office this year. But the last straw, he said, came on Monday, the first day of capital controls, when he found himself waiting in a long ATM line to receive his daily cash allotment of 60 euros.

"I went home to my grandchildren and I thought, ’What Greece am I leaving them?’" he said, twisting the strand of worry beads he had taken up since the doctor told him to quit smoking. "So I made up my mind to come here to demand hope. Greece in Europe. A European Greece."

Initially, European officials were furious about Tsipras’ decision to call a referendum, interpreting the move as brinkmanship in the negotiations. But on Monday, several European leaders, notably Juncker, began openly lobbying Greek voters to choose "yes."

Some analysts said European officials were hoping that a "yes" vote on Sunday would force Tsipras to resign, a development that would be welcome to the creditors after months of bitter clashes with government officials in Athens.

Some European officials have been signaling that they would like to use the coming days to try to persuade Tsipras to stop pushing for a "no" vote - an unlikely prospect given the consistent position Tsipras has taken against the terms offered so far by the creditors.

Courtesy:NDTV