Greece Could Default As Early As Next Week

April 2, 2015 1 Comment

As much as Greek Finance Minister Yanis Varoufakis would love to reassure everyone that there is no possible way that Greece could run out of funds, recent events and economic evidence suggest otherwise. Tax revenues for the nation this year are more than €1 billion short of the target Greece banks need for liquidity. Depositor flight has increased to about €400 million, which is the largest run Greece has experienced since February. And just yesterday, the European Central Bank increased the amount of Emergency Liquidity Assistance to Greek banks by €700 million.

Now Greece has told its creditors that it will run out of cash on April 9th, which is bad luck for the International Monetary Fund, because that is when the €458 billion is due. Of course an easy thing to do would be to admit that Greece isn’t going to be repay the IMF. However, not paying your IMF loans is similar to me not paying my American Express credit card bill: You just don’t do it. A resolution can be reached, although uncertainty that one can be reach remains very high.

Of course, even with my credit card, not paying my Amex bill wouldn’t mean that my account would be filed into delinquency. Greece may be allowed a one month grace period. Creditors would immediately send a notice to Greece recommending a payment as soon as possible. However, until a payment is made, Greece isn’t permitted to use any funds provided by the IMF. However, being one month overdue on outstanding obligations would constitute a default.

Also, notification that Greece is 30 days delinquent on IMF loans would also constitute a default on European Financial Stability Facility loans as well, according to the agreement between Financial Assistance Facility and Greece. This would risk the EFSF canceling all or part of its assistance to Greece, and possibly demanding that the principal amount of the loan to be due immediately.

In the meantime, Greece needs to find a way to rollover €2.4 billion within the next two weeks.

It’s pretty clear that Greece needs money and it needs it as soon as possible. They also, need to debt swap to reduce its current debt burden, as it was initially assumed that the nation would only have this repayment problem during key payment dates in June/July. However, it has only been a month since Greece was thought to have averted their official crisis.

The European Union opposes any debt write-down agreements. Instead, their willing to accept longer maturities with lower interest rates. Greece will most likely have no choice but to accept this deal, and Syriza will be breaking their campaign promise, once again. 

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