Greece threatens default as fresh reform bid falters

By Mehreen Khan 01 April 2015

Creditors likely to continue squeeze on anti-austerity government with IMF payment looming

The government will prioritise payments of public sector wages and pensions over its creditors, says interior minister

The Greek government has threatened to default on its loans to the International Monetary Fund, as Athens continued its battle to convince creditors for a fresh injection of bail-out cash.

Greece's interior minister told Germany's Spiegel magazine, his country would not respect a looming €450m loan repayment to the fund on April 9, without a release of much-needed bail-out funds.

"If no money is flowing on April 9, we will first determine the salaries and pensions paid here in Greece and then ask our partners abroad to achieve consensus that we will not pay €450 million to the IMF on time," said Nikos Voutzis.

The cash-strapped government has struggled to keep up with its wage and pensions obligations having agreed a bail-out extension on February 20.

Athens insists it has enough money to last it until the middle of April, but a final agreement on any deal is unlikely to be secured before the end of the month.

A Greek government spokesperson later denied the reports of a deliberate default, saying the country still hoped for a "positive outcome" to its debt negotiations.

The comments came as the Eurozone's working group discussed a new 26-page plan of reforms from Athens on Wednesday.

Aiming to generate an estimated €6bn in 2015, Athens has pledged a range of revenue-raising measures including cracking down on tax evasion, carrying out an audit on overseas bank transfers, and introducing a "luxury tax".

The document also warned brinkmanship on the part of the Eurozone meant the "viability" of the currency union was now "in question."

"It is necessary now, without further delay to turn a corner on the mistakes of the past and to forge a new relationship between member states, a relationship based on solidarity, resolve, mutual respect," said the proposal.

The Leftist government has continually fallen short of creditor demands, who hold the purse strings on €7.2bn in bail-out cash the government requires over the next three months.

However, the latest blueprint is unlikely to satisfy lenders as it lacks details on labour market liberalisation or pensions reforms. Previous privatisations of the country's assets were also described as a "spectacular" failure, generating far less in revenues for the state than first envisaged.

Despite this, the anti-austerity government predicts the measures will lead to an ambitious 3.9pc primary budget surplus, surpassing the original 3pc target demanded by creditors, and which was thought to have been relaxed following the February 20 agreement.

Eurozone officials indicated Greece would still have to commit to further measures to unlock the funds, on Wednesday night.

• How Greece Pushed Europe to the Edge

In a further blow to Athens, ratings agency Fitch downgraded the country's four biggest banks, who are being kept alive through emergency funds from the European Central Bank.

Fitch cited the "funding, liquidity and solvency pressures in the context of the exceptionally challenging domestic operating environment" for the move, which cut the bank's ratings to 'CCC' from 'B-'.

^{Source: Oxford Economics/Haver Analytics}

The ECB hiked its emergency funding (ELA) for Greece by €700m, according to reports on Wednesday. Fitch calculates Greek banks have lost 15pc of their deposits since November 2014.

Having been kept on a tight leash by the Brussels Group, Greece has been scrambling around for cash as it desperately strains to keep itself afloat.

In a sign of the country's deteriorating financial position, the government forecasts growth will reach 1.4pc in 2015, down from a projected 2.9pc. The government has funding needs of €19bn this year, estimated the finance ministry.

Mr Voutzis said Athens would continue to pursue claims to return €1.9bn of rescue funds it says was inadvertently returned by the government to its creditors.

Eurozone officials have already rejected one attempt to release the cash from the European Financial Stability Fund.

The Greeks have also made a bid to release a further €1.2bn from the ECB, from profits made on its holdings of Greek debt. These are unlikely to be granted to the Leftist government until it completes it bail-out programme after June.

Any failure to repay the IMF on time may not immediately result in an outright default to the Fund, but would likely result in no further disbursement of loans until a repayment is agreed.

According to the IMF's protocol, it will take at least a month before the executive board is notified that an payment is overdue. Before then, debtor countries are urged to meet their obligations as fast as possible.

No country has ever officially defaulted to the IMF in its 70-year history, and only the likes of Sudan, Zimbabwe and Somalia have deferred repayment and been in arrears.

Greece also faces a further €1.4bn in debt rollovers it needs to complete in April, a task which will become difficult as the ECB has moved to ban the country's banks from increasing their holdings of Greek government debt.

Greece threatens default as fresh reform bid falters - Telegraph