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Analysis

Greece's difficult road ahead

by William Baunton

Thu 9 Apr 2015

Greece's forthcoming debt repayments Enlarge Chart loading Image

What the chart shows: The monthly totals of forthcoming debt repayments due by the Greek government for the remainder of 2015 (€bn)

Why it is important: There are few options left for the Greeks. Greece made its much-publicised 9 April loan repayment to the IMF, giving the government some breathing space. Once confirmation of this payment had surfaced, yields on the shortest dated Greek debt declined, with five-year bonds falling 30 basis points to 14.98%. In the preceding week, the government warned it was running out of resources to make the payment. Yanis Varoufakis, Greek finance minister, had assured the IMF’s Christine Lagarde that Greece would pay up, despite, along with other officials, stating earlier they would rather pay public sector workers’ salaries than the IMF. Varoufakis has now said that Greece will ‘meet all obligations to all its creditors, ad infinitum.’

The chart demonstrates the difficult road ahead if he is to hold to that statement. €930m is payable to the IMF in May on top of €1.2bn in short-term debt the government needs to service. In total, Greece is scheduled to pay the IMF €9bn in 2015. Greek officials have warned that cash reserves will be exhausted by the end of this month if a new reform package is not made with the euro area.

If Greece were to fail to make payments to the IMF, it would become the first advanced economy in history to default on an IMF loan, joining the list of mostly war-torn, developing countries which includes Somalia, Sudan, Liberia and D.R. Congo. The IMF holds roughly 6% of Greece’s €320bn government debt.

Strictly speaking, a missed payment does not immediately lead to a default, as the IMF allows a 30-day period before it becomes a technical default. However, to bondholders, this is just a minor detail. Even if the payment was made during that period, it would send reverberations through the markets. After all, defaulting on an IMF loan is considered a default on all euro area debt. This could lead to many outcomes, some of which are staggering. One is that the European Financial Stability Facility could declare the loans due immediately. The EFSF owns 45% of the Greek government’s €320bn debt.

This action by the EFSF and others would trigger further defaults through the system. Outflows of deposits from Greece would rise with those who haven’t already taken their money out the country doing so. With €80m due to the ECB on 20 April and IMF repayments stacking higher in the coming months, the choice between default and not paying pensions becomes a stark reality.