October 22, 2020

IMF loan default is Greece’s worst option


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_82141012_81825639By Mohamed El-Erian From Newsmax

Finance Minister Yanis Varoufakis’s surprise decision to meet with International Monetary Fund Managing Director Christine Lagarde in Washington on Sunday added to the suspense over whether Greece would make its April 9 debt payment to the fund.

This is a consequential question because defaults on loans from the IMF, one of the world’s few “preferred creditors,” are extremely rare. When they have occurred, the debtors have tended to be fragile or failed states in the developing world and not advanced countries, let alone members of the euro zone, one of the world’s elite economic groups.

The very fact that the 450 million euros (almost $500 million) payment is in doubt reflects the extreme economic, financial and socio-political circumstances facing Greece. It is hard to imagine any outcome to this predicament that would improve Greece’s lot.

Having struggled to restore economic growth, and with an unemployment rate of 26 percent, Greece isn’t generating enough revenue to meet all of its obligations.

Even though the economic logic mostly works in its favor, Greece’s ability to mobilize additional funding from abroad has stalled due to both mismanaged negotiations and creditor intransigence.

Meanwhile, Greece’s domestic socio-political context makes it difficult for the government to make payments to the IMF, especially as it struggles to pay salaries and finance basic social services.

Nonetheless, the payment to the IMF needs to be made.

Countries that default on their IMF obligations often experience widespread disruption to their cross-border financial relations. In the case of Greece, such a default would hinder the flow of funds from the European Central Bank, currently a lifeline for the country’s banks. And it would accelerate the outflow of deposits from banks, increasing the probability that a slow bank jog will turn into a destabilizing bank run.

Realizing that, it is likely the Greek government will find a way to make the payment to the IMF by April 9 (or shortly thereafter within the allowable grace period) — and after the meeting in Washington on Sunday, Lagarde said she had received “confirmation” from Varoufakis that the payment “would be forthcoming.”

But doing so may just be the least-bad option for Greece in a lose-lose situation.

The payment to the IMF wouldn’t necessarily make it easier for Greece and its creditors to better work collaboratively to restore the country’s growth and financial viability with the euro zone.

Sadly, it is more likely to exacerbate tensions and even increase the probability of a “Graccident” (that is, some type of economic/financial/political disruption that pushes Greece out of the euro zone against the wishes of all major players).

Even though Greece has undergone one of the largest fiscal adjustments in history, the continuing hemorrhaging of funds due to capital flight means that it can ill-afford a $500 million net transfer to one of its official creditors. If the outlay isn’t matched rapidly by new funding from its creditors — which has been mostly halted since August — this highly visible depletion of funds could accelerate the withdrawals from domestic banks.

The government will also struggle to maintain its credibility with those who had been its most ardent political supporters — people who bought into the electoral rhetoric of putting Greek interests ahead of those of foreign creditors.

As a result, if the payment is made, the government may find it even harder to get legislative approval for the structural reforms the country needs.

Concurrently, it would be expected to secure greater concessions from creditors, including a meaningful relaxation of austerity and significant debt forgiveness.

The uncertainty over this week’s payment to the IMF is just the latest episode of a multiyear tragedy for Greece and its creditors as they try to navigate a situation that has been managed too timidly for too long.

Unless the two sides collaborate more effectively toward more decisive outcomes, it is a matter of time before one of these episodes becomes the ultimate catalyst for a Graccident that all are eager to avoid.

For more on this story go to: http://www.newsmax.com/Finance/MohamedElErian/greece-imf-loan-default-europe/2015/04/06/id/636591/#ixzz3WZGFjX72

Related story:

Lagarde welcomes loan payment commitment from Athens

From BBC

International Monetary Fund chief Christine Lagarde has welcomed news that Athens will make a loan payment due to the IMF this week.

On Sunday, Greece’s finance minister Yanis Varoufakis said his country intended to meet “all obligations to all its creditors, ad infinitum”.

His comments followed a meeting in Washington with International Monetary Fund officials.

It has been almost five years since the start of the Greek bailout.

Ms Lagarde said in a statement on Sunday that she and Mr Varoufakis had agreed continuing uncertainty over Greece’s ability to repay its debt was not in the country’s interest.

“I welcomed confirmation by the minister that payment owing to the Fund would be forthcoming on April 9th,” Ms Lagarde said.

“I expressed my appreciation for the minister’s commitment to improve the technical teams’ ability to work with the authorities to conduct the necessary due diligence in Athens, and to enhance the policy discussions with the teams in Brussels, both of which will resume promptly on Monday.”

There had been concerns that Greece would not be able to meet its IMF loan repayment of €450m.
Media caption Greek finance minister Yanis Varoufakis: “We are intent upon reforming Greece deeply”

Aid frozen

Greece has been in tense, drawn-out negotiations in recent months with its creditors over its bailout program.

In February, its government negotiated a four-month extension to its bailout in return for dropping key anti-austerity measures and undertaking a eurozone-approved reform programme.

But IMF leaders together with the European Union have frozen aid to the cash-strapped nation until its government comes to an agreement on the reform package.

Last week, the country presented a new package of reforms in the hope of receiving some funding, but the proposal has not yet received approval from EU and IMF lenders.

The delay of about €7.2bn ($7.9bn; £5.3bn) due to be delivered to Greece has forced the government to use its reserves to meet its obligations.

For more on this story go to: http://www.bbc.com/news/business-32193571

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