(BI) INSIGHT: Greek Deal May Come Too Late to Pay IMF — So What?

(BBG) INSIGHT: Greek Deal May Come Too Late to Pay IMF — So What? 
By Maxime Sbaihi and Jamie Murray

Even if a deal is agreed between finance ministers, Greece may miss its payment to the
International Monetary Fund on June 30. A disbursement from creditors is only likely once an agreement has made it through euro-area parliaments. That takes time. There is legislation to draft and debates to be had, not least in Greece. Other sources of funding might present themselves, but even if they don’t, the consequences of a missed IMF payment aren’t too serious. Here’s why.

On June 30, Greece is supposed to be making a payment of about 1.5 billion euros to the IMF –- that comprises all the June payments the country decided at the start of the month to bundle into one. Without aid, the cash-strapped government won’t be able to meet the obligation.

The Disbursement

Developments at the negotiation table have raised hopes for a deal as soon as this week (the Eurogroup is meeting tomorrow, there’s a European summit on Thursday and that’s followed by another on Friday). Even if an extension of the current bailout is agreed, the validation process will take some time: the package has to go through the Greek Parliament and be approved by all creditors, individual members states included. That might take longer than a couple of days so a disbursement of funds looks to be off the table in time to make the IMF payment. That view is shared by Eurogroup Chairman Jeroen Dijsselbloem, who on June 18 described a disbursement arriving in time to pay the IMF about 1.5 billion euros as “simply impossible.”

Other Sources of Funding

Of course, 1.5 billion euros isn’t a lot of money in sovereign- debt terms and funding could come from other sources. One possibility would be that the European Central Bank raises the limit on the amount of T-bills banks can hold, allowing Greece to issue just enough short-term securities to meet the IMF payment. Here, the interpretation of jargon could matter if the package is still making its way through national parliaments on June 30. ECB President Mario Draghi said last week that “for the Governing Council to reconsider the T-bills ceiling, there should be a credible perspective for a successful conclusion of the current review and subsequent implementation which would imply the disbursement of programme funds by euro area member states.”

Our reading of this is that an increase is unlikely — how will the ECB know if the program will be implemented if it is still being debated in Athens? Still, an interim increase can’t be
ruled out. Another possibility is a direct injection from the ECB itself. The central bank has made profits on Greek bonds through its Securities Markets Programme, that should eventually make their way to Greece. The problem with releasing those funds is essentially the same as for lifting the T-bill issuance limit. Greece’s other sources of cash are scarce. Tax receipts tend to get a seasonal boost in July, providing a boost to the Greek Treasury, but that would be too late. So without something from the ECB, Greece could miss its payment to the IMF at the end of June.

How Bad Is a Missed IMF Payment?

It’s not, though Greece will be in arrears. According to the IMF protocol, three months after a missed payment, the IMF declares a country in arrears on its website — though a press statement would be likely on the day. IMF Managing Director Christine Lagarde’s warning this month that “there is no grace period” probably reflects the intensity of the negotiations. The first step of the escalation process for Greece is an angry letter. Up to 15 months later, Greece would be ineligible for technical assistance from the fund – and it’s debatable that that would be seen as a negative development in Athens. It wouldn’t be for up to 18 months that Greece’s voting rights within the IMF are withdrawn. On the ratings side, agencies such as Standard and Poor’s have already stated that a missed payment to the IMF doesn’t qualify as default since it is regarded as an official creditor, not a private one.

Since the IMF payment can be missed without any obvious ill effects and rating agencies would not be especially concerned, focus might shift to how the ECB could react. The institution is keeping the banking sector alive through its ELA facility on the sole criterion of bank solvency. There is very little chance for ELA to be shut down on June 30 even without a deal. ECB Vice-President Vitor Constancio said on May 28th that “there is no
automatic — and I underline the word — connection between a default of the Greek government and the insolvency of Greek banks.” The ECB likes to repeat that it is a rule-based institution but ELA decisions are made at the discretion of a two-thirds majority of the Governing Council.

It seems, then, that Greece could probably get away with it, at least while negotiations continue.