By Mehreen Khan 05 April 2015
Cash-starved Athens has threatened to deliberately miss its loan repayment to the IMF. But what would be the fall-out of a disorderly default?
No county has ever defaulted to the Fund in its 70-year history
The Greek government faces another crucial deadline in its interminable bail-out drama this week, as fears mount that the country could become the first developed nation to ever default on its international obligations.
After a harrowing March, cash-strapped Athens now faces a €448m payment to the International Monetary Fund on Thursday.
But with public sector wages and pensions to pay out, a cacophony of voices on Syriza's Left have vowed to prioritise domestic obligations unless creditors finally unlock the remainder of its €240bn bail-out programme.
"We are a Left-wing government. If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer," a senior Greek official told The Telegraph last week.
The rhetoric is a far cry from February, when Greece's finance minister pledged his government would "squeeze blood out of a stone" to meet its obligations to the Fund. Yanis Varoufakis will now spend Easter Sunday with IMF director Christine Lagarde in a bid to gain some leeway on the country's reforms-for-cash programme.
Greece owes €9.7bn to the IMF this year. Missing its latest instalment in order to pay out its social security bill on April 14, would see the country fall into an arrears process, unprecedented for a developed world debtor.
Although no nation has ever officially defaulted on its obligations in the post-Bretton Woods era, Greece would join an ignominious list of war-torn nations and international pariahs who have failed to pay back the Fund on time.
What happens after April 9?
Missing Thursday's payment would not immediately trigger a default however.
According to IMF protocol, Greece would be afforded a 30-day grace period, during which it would be urged to pay back the money as soon as possible, and before Ms Lagarde notifies her executive board of the late payment.
Following this hiatus, a technical default could be declared a month later, when "a complaint regarding the member’s overdue obligations is issued by the Managing Director to the Executive Board".
In the interim, Greece may well stump up the cash having spooked creditors and the markets of the possibility of a fatal breach of the sanctity of monetary union.
Should no money be forthcoming however, the arrears process may well extend indefinitely.
Greece's IMF burden would also start piling up, with the government due to pay another €963m by May 12.
Stopping the cash
Although the exact process is uncertain, falling into a protracted arrears procedure could have major consequences for continued financial assistance from Greece's other creditors - the European Central Bank and European Commission.
"If Greece defaults to the IMF, then they are considered to be in default to the rest of the Eurozone," says Raoul Ruparel, head of economic research at Open Europe.
The terms of Greece's existing bail-out programme stipulate that a default to the IMF would automatically constitute a default on the country's European rescue loans.
"Such a scenario would risk the European Financial Stability Facility (EFSF) cancelling all or part of its facility or even declaring the principal amount of the loan to be due immediately," say analysts at Bank of America Merrill Lynch.
Should the EFSF take such a decisive move, it could activate a range of cross default clauses on Greek government bonds held by private investors and the ECB. These clauses state a default to one creditor institution applies to all.
The political and market damage that may ensue would be substantial. Popular sentiment in creditor nations would turn against the errant Greeks, while the position of the ECB in particular could quickly come under the spotlight.
The central bank has kept Greek banks on a tight leash, maintaining that it would only restore normal lending operations to the country once "conditions for a successful completion of the programme are in place".
A wave of defaults may force the ECB into finally pulling the plug on the emergency assistance it has been providing in ever larger doses since February.
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Scrambling for funds
Whatever the outcome, Greece's coffers are fast depleting.
In addition to the half a million euros it owes the Fund this week, the Leftist government faces debt interest payments of €194m to private bondholders on April 17, followed by a further €80m to the European Central Bank three days later.
The anti-austerity government will also need to rollover €2.4bn in short-term treasury bills, which are likely to result in higher debt servicing costs. An estimated 15pc of deposits have also fled the country's banks since November 2014.
Default or no default, Greece will be scrambling for cash unless it is revived by a fresh injection of bail-out cash soon.