Greece defaults

Greece becomes first developed nation to default on international obligations

Greece has missed its June deadline to pay €1.6 billion to the IMF, becoming the first developed country to default on its international obligations.

RT,

30 June 2015

The news hardly comes as a surprise. On Tuesday, Greek Finance Minister Yanis Varoufakis told journalists that Athens would not repay the €1.6 billion IMF debt on time.

Skipping a payment to the IMF is referred to as arrears – owed money that should have been paid earlier – in the terminology of the Fund. It should be officially reaffirmed by the IMF chief Christine Lagarde who in a month should notify the Executive Board of the Fund.

MORE: Greece misses June deadline to pay €1.6 billion to the IMF http://t.co/BUa1Evue0Lpic.twitter.com/rikbjvObqX

— RT (@RT_com) June 30, 2015

In fact, this could be classified as a default, as any other failure to pay its debt on time. This could trigger a cross-default on Greece's multibillion-dollar commitments to the European Financial Stability Fund (EFSF). The IMF cannot issue new loans the country, which has arrears.

The question now is what’s next for the country’s financial system, the people and its membership in the Eurozone.

On Tuesday Greece asked the European Stability Mechanism (ESM) that includes all of the 19 Eurozone members for a new bailout that’ll cover the country’s financial needs during the next 2 years.

The Eurogroup refused to extend the bailout program to Greece, rejecting Greek Prime Minister Alexis Tsipras’ latest request for a new bailout, Finnish Finance Minister Alexander Stubb said on Tuesday.

Read more - Eurogroup refuses to extend bailout program to Greece

The Greek government on Tuesday asked for a new bailout program from ESM that would cover all its financial needs for the next two years. The request included a restructuring plan for Greece’s debt to the European Financial Stability Facility (EFSF), which accounts for about 63 percent of the country’s total debt.

German Chancellor Angela Merkel said on Tuesday that her country will not consider a third bailout for Greece before a referendum in Greece on July 5 takes place, various media outlets have reported.

On June 5 Greece invoked a 1970s IMF rule that allowed it to bundle all of its €1.6 billion payments due June into one, thus avoiding immediate default. However, it failed to pay even under these conditions.

Greece is also due to pay €6.6 billion to the ECB in July and August.

The ECB has already turned down the Greek call for expanding €89 billion emergency liquidity assistance (ELA) to Greece by €6 billion to tackle deposit flight. This resulted in closing banks for a week and limiting withdrawals to €60 a day.

The Greek government led by Prime Minister Alexis Tsipras came to power aiming to end austerity measures, and has repeatedly said its goal is to stay within the euro.

On Saturday, the government announced a national referendum on the creditors’ offer to the country.

Even if the referendum is not on Greece leaving the Eurozone, many leading European politicians have said that a “No” answer would be a refusal to stay with Europe.

Voting “No” would mean a suicide for Greece, said European Commission President Jean-Claude Juncker Monday. However, German Finance Minister Wolfgang Schaeuble said Tuesday Greece can maintain its membership in the Eurozone even if the nation votes against austerity reforms this Sunday.

Greece Becomes First Developed Country To Default To The IMF

Zero Hedge,

30 June 2015

Faced with almost impossible choices...

And just as promised earlier in the week, Greece has now passed the midnight deadline for repayment of the €1.6 billion bundled loans due to the IMF and in thus in default

As AP reports,

Greece's international bailout formally expires, country loses access to existing financing.

Yes we are fully aware that using the pejorative term 'default' makes us members of the ignorati, but what else do you call it when you fail to pay back a contracted debt in a timely fashion? (and don't say 'arrears') Anything else is semantics.

• *IMF SAYS GREECE FAILED TO MAKE PAYMENT DUE TUESDAY
• *IMF TO CONSIDER GREEK REQUEST FOR PAYMENT DELAY IN DUE COURSE
• *IMF BOARD INFORMED THAT GREECE IS NOW IN ARREARS

This is the first time an advanced economy has defaulted to The IMF and is by far the largest default The IMF has ever faced.

Below is the full list of countries who are (ahem Zimbabwe) or have been in "protracted arrears" to the IMF in the past. Greece is now officially on this list.

What happens next:

And therefore Greece is poised between remaining a member of the eurozone or leaving it. In fact, as WSJ's Stephen Fidler explains, there are five possible future currency arrangements for Greece. Here they are...

1. Greece stays in the eurozone: This is the option likely to cause the smallest short-term disruption to the Greek economy.  The Greek central bank would retain access to liquidity from the European Central Bank, and the Greek banks would stay on life support. This looks increasingly likely to be accompanied by some kind of further negotiated debt relief. To get it, Greece would almost certainly have to agree to more conditions of the sort successive Greek governments have found it hard to accept.

2. Greece keeps the euro, but sits outside the eurozone: Jacob Funk Kierkegaard of the Peterson Institute for International Economics in Washington calls this the “Montenegro option” and argues this is the most likely outcome should Greece exit the eurozone.  This would not be “a new drachma, but Montenegro—i.e. Greece becomes just another relatively poor unilaterally euroized non-EU Balkan economy,” he writes here. In some ways, this would be the worst of all worlds because Greece would lose access to the ECB. Countries using a foreign currency as legal tender have no access to a lender-of-last-resort, which means that every bank liquidity crisis becomes a solvency crisis. They therefore tend to have stunted domestic financial sectors — which almost every academic study shows is bad for growth — or have a banking system owned by foreigners, which exports the lender-of-last resort role to other countries’ central banks. (Mexico didn’t adopt the dollar after the 1994-95 financial crisis — but in order to avoid an undue shrinkage of its banking sector, it allowed most of its banks to be bought by foreigners.)

3. A currency board: In this case, Greece would create a new currency but lock it to the euro  – as Estonia did with the German mark in 1992 after it gained independence from the Soviet Union. The amount of new drachmas in circulation would be limited by the size of Greece’s international reserves: about $5.8 billion at the last count. Advocates argue that this would impose discipline on the Greeks — poor economic policies lead to an outflow of reserves and therefore of the domestic monetary base, which pushes up drachma interest rates, while good policies have the reverse effect. The drawback is that again the central bank is limited in its lender-of-last resort powers because it cannot create money freely. It also imposes discipline that, for now, may make it look unappetizing to Greece’s current rulers. It’s not much talked about, has a few enthusiastic and long-standing cheerleaders, but is a theoretical possibility. Here’s Steve Hanke arguing in favor.

4. A dual system: Here the drachma and the euro would circulate side-by-side. This has many historical precedents going back centuries. In practice, a dual system is likely to emerge when the Greek government runs out of euros and has to pay its domestic bills in government IOUs. The IOUs could at some future date be redeemed in euros, or could be eventually redeemed in drachmas, but they would initially be euro-denominated obligations of the government that would have a lesser value in the public mind than euro notes or coins. This state of affairs could continue for a long time, but there is an economic tendency called Gresham’s Law: ”Bad money chases out good.” Over time, euros would disappear from circulation because people would hoard them as a store of value  – and people would spend the government IOUs. De facto, the drachma, whether or not it would so be called, would become the main means of exchange.

5. The new drachma: The move to the new drachma may well not come with a bang, but gradually — as described in 4 above. But an eventual formal switch of the currency would give Greece control over its own monetary policy.  However, a new currency — which would likely float against the euro and other major currencies — would likely create enormous short-term disruption, not least because a heavy devaluation would follow and the banks would in effect be insolvent. Longer-term, it could be a motor for future growth of the Greek economy — because it would stimulate demand for Greek exports by lowering in real-terms the price of goods and services produced in Greece.  Longer term, the effects of a devaluation depends on the quality of economic policies that accompany it. It will create inflation, by increasing the costs of imports. One important issue is how much the government raises wages and pensions to compensate for higher inflation. The more domestic wages and pensions are allowed to rise, the less impact the devaluation will have in simulating Greek exports longer term and the lower the benefits to economic growth.

Place your bets.