Greece Becomes First Developed Country To Default To The IMF

Tyler Durden's picture

Faced with almost impossible choices...

 

And just as promised earlier in the week, Greece has now passed the midnight deadline for repayment of the €1.6 billion bundled loans due to the IMF and in thus in default.

Yes we are fully aware that using the pejorative term 'default' makes us members of the ignorati, but what else do you call it when you fail to pay back a contracted debt in a timely fashion? (and don't say 'arrears') Anything else is semantics.

  • *IMF SAYS GREECE FAILED TO MAKE PAYMENT DUE TUESDAY
  • *IMF TO CONSIDER GREEK REQUEST FOR PAYMENT DELAY IN DUE COURSE
  • *IMF BOARD INFORMED THAT GREECE IS NOW IN ARREARS

“I can also confirm that the IMF received a request today from the Greek authorities for an extension of Greece’s repayment obligation that fell due today, which will go to the IMF’s Executive Board in due course,” IMF spokesman Gerry Rice says in e-mailed statement.

This is the first time an advanced economy has defaulted to The IMF and is by far the largest default The IMF has ever faced.

Below is the full list of countries who are (ahem Zimbabwe) or have been in "protracted arrears" to the IMF in the past. Greece is now officially on this list.

And as AP reports,

Greece's international bailout formally expires, country loses access to existing financing.

What happens next:

 

And therefore Greece is poised between remaining a member of the eurozone or leaving it. In fact, as WSJ's Stephen Fidler explains, there are five possible future currency arrangements for Greece. Here they are...

1. Greece stays in the eurozone: This is the option likely to cause the smallest short-term disruption to the Greek economy.  The Greek central bank would retain access to liquidity from the European Central Bank, and the Greek banks would stay on life support. This looks increasingly likely to be accompanied by some kind of further negotiated debt relief. To get it, Greece would almost certainly have to agree to more conditions of the sort successive Greek governments have found it hard to accept.

 

2. Greece keeps the euro, but sits outside the eurozone: Jacob Funk Kierkegaard of the Peterson Institute for International Economics in Washington calls this the “Montenegro option” and argues this is the most likely outcome should Greece exit the eurozone.  This would not be “a new drachma, but Montenegro—i.e. Greece becomes just another relatively poor unilaterally euroized non-EU Balkan economy,” he writes here. In some ways, this would be the worst of all worlds because Greece would lose access to the ECB. Countries using a foreign currency as legal tender have no access to a lender-of-last-resort, which means that every bank liquidity crisis becomes a solvency crisis. They therefore tend to have stunted domestic financial sectors — which almost every academic study shows is bad for growth — or have a banking system owned by foreigners, which exports the lender-of-last resort role to other countries’ central banks. (Mexico didn’t adopt the dollar after the 1994-95 financial crisis — but in order to avoid an undue shrinkage of its banking sector, it allowed most of its banks to be bought by foreigners.)

 

3. A currency board: In this case, Greece would create a new currency but lock it to the euro  – as Estonia did with the German mark in 1992 after it gained independence from the Soviet Union. The amount of new drachmas in circulation would be limited by the size of Greece’s international reserves: about $5.8 billion at the last count. Advocates argue that this would impose discipline on the Greeks — poor economic policies lead to an outflow of reserves and therefore of the domestic monetary base, which pushes up drachma interest rates, while good policies have the reverse effect. The drawback is that again the central bank is limited in its lender-of-last resort powers because it cannot create money freely. It also imposes discipline that, for now, may make it look unappetizing to Greece’s current rulers. It’s not much talked about, has a few enthusiastic and long-standing cheerleaders, but is a theoretical possibility. Here’s Steve Hanke arguing in favor.

 

4. A dual system: Here the drachma and the euro would circulate side-by-side. This has many historical precedents going back centuries. In practice, a dual system is likely to emerge when the Greek government runs out of euros and has to pay its domestic bills in government IOUs. The IOUs could at some future date be redeemed in euros, or could be eventually redeemed in drachmas, but they would initially be euro-denominated obligations of the government that would have a lesser value in the public mind than euro notes or coins. This state of affairs could continue for a long time, but there is an economic tendency called Gresham’s Law: ”Bad money chases out good.” Over time, euros would disappear from circulation because people would hoard them as a store of value  – and people would spend the government IOUs. De facto, the drachma, whether or not it would so be called, would become the main means of exchange.

 

5. The new drachma: The move to the new drachma may well not come with a bang, but gradually — as described in 4 above. But an eventual formal switch of the currency would give Greece control over its own monetary policy.  However, a new currency — which would likely float against the euro and other major currencies — would likely create enormous short-term disruption, not least because a heavy devaluation would follow and the banks would in effect be insolvent. Longer-term, it could be a motor for future growth of the Greek economy — because it would stimulate demand for Greek exports by lowering in real-terms the price of goods and services produced in Greece.  Longer term, the effects of a devaluation depends on the quality of economic policies that accompany it. It will create inflation, by increasing the costs of imports. One important issue is how much the government raises wages and pensions to compensate for higher inflation. The more domestic wages and pensions are allowed to rise, the less impact the devaluation will have in simulating Greek exports longer term and the lower the benefits to economic growth.

Place your bets.

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unplugged's picture

"money is gold, and nothing else" - JP Morgan

"Gold Is Currency; No Fiat Currency, Including the Dollar, Can Match It"  - Alan Greenspan


TahoeBilly2012's picture

So in the end, the difference to the guy on the street is next to nothing and I have waisted like 22 hours of my life reading about all this.

kaiserhoff's picture

Nein.  It's over. 

Germany has decided to pull the plug, and stop the losses.  The only thing left to do is make this painful enough to scare the shit out of Italy and Spain...,

That won't work either.

joseJimenez's picture

And in the next episode...

NoDecaf's picture

Throw those worthless Greeks back into the euro!!

 

 

Captain Debtcrash's picture
Captain Debtcrash (not verified) NoDecaf Jun 30, 2015 4:07 PM

I guarantee one thing no matter what path is taken, Greece’s debt will not be paid, along with a lot of other sovereign debtUnpayable debt is not an asset, no matter what Krugman might say. 

Ploutos74's picture

Greece just folded. The Yes vote has a clear lead, banks are all but out of money already, which means that till Sunday everyone will want Tsipras's head on a platter. Tomorrow they'll arrange for a new MoU hoping to save some face or alternatively their lives from lynching

Fun Facts's picture

If Greece goes the iceland route, defaults and puts the banksters in jail, only then can Greece begin to recover.

Just like Iceland.

Colonel Klink's picture

Dear IMF,

Go fuck yourself and cram your created from thin air debt up your ass.

Signed,

All 7 billion rational little people on the Earth

Model T's picture
Model T (not verified) Colonel Klink Jun 30, 2015 6:51 PM

Yawohl, mein Oberst !!

knukles's picture

Wait wait wait wait wait
Last I heard was that the EU bigamajiggies said that they thought that the Greeks could stay in the Eu regardless of outcomes with the debt, aka can stay if they default.
Last I heard was that the Eu bigamajiggies said that Greece could stay in the EU even if they left the Euro
And last I heard was that Greece wanted to stay as a part of the EU, the rest of the drill, be damned.

And Greece holds all the cards, the interest and principal payments being merely the lever for the rest of the conditions, so looks to me like Greece defaults, reestablishes the Drachma and stays a EU member.
Unfortuantley it would appear that the rest of the bigamajiggies in Europe don't see the full picture of debt repayments being one small action inside a much larger objective

James_Cole's picture

US IMF quota: 17.7%, next largest: Japan 6.6%, Germany 6%, France 4.5%

Number of IMF success stories: 0.

Save_America1st's picture

how long before that 112 tons of phyzz gold Greece has gets "liberated" from them?  

disabledvet's picture

Japan and China have over a TRILLION in treasuries EACH.

"Get to work Europa."

Ying-Yang's picture

Thanks for the story!

I am watching Greece to imagine how this will play out in the US. No template will be the same for each event but it is wise to watch and learn!

 

Good Stuff ZH

John Wilmot's picture

Wait til Greece goes off the euro, goes back to the drachma, and then prints the fucking crap out of it to finance their sputtering welfare-state - that's what the terminal crisis will look like when it comes to the US.

Lore's picture

Varoufakis must be talking with counterparts in Reykjavik and Moscow.  

Ironic that the latest bankster house of cards begins its fall in Greece. Talk about coming full circle! How bad do things have to get this time, before people throw off their chains?

chunga's picture

What's up with the CDS that, if triggered by this default, were supposed to cause financial armageddon?

THX 1178's picture

Credit Default Swaps are triggered when the IMF announces that Greece has defaulted. Greece has defaulted, but the IMF calls it "Arrears" meaning a delay of payment. Anything to keep the broken evil system from shattering. So this will go on maybe until late september... say September 23, 2015 perhaps.

disabledvet's picture

I was looking for option "IMF gets its money back" but failed to see that one on the list.

Did I miss something?

Fun Facts's picture

Looks like the International Mother Fuckers are going to have to whip up a fresh batch of SDR's out of thin air [backed by the people's future labor] to make up the shortfall.

chunga's picture

There's one argument out there that this is all the lazy Greek's fault and this is where it really stops holding water. The motherfuckers at IMF know this happened and are just going to make believe that it didn't. This is why I'm an advocate for chopping the entire world of finance, lock stock and barrel, from humanity. With extreme prejudice I might add.

Four chan's picture

the central bank's system, enslave a free people to debt, capture all assets through boom and bust with currencies it creates out of thin air. this is why the patriots who designed our system listed only gold and silver as the national and honest currency. the jew system is a debt based system designed for enslavement to jews and for the enrichment of their financial structures. AKA THE SYSTEM IS WORKING PERFECTLY IN GREECE AND AROUND THE GLOBE. 

ZD1's picture

All the lazy Greek's fault? No.

Was it the Greek government's fault for a lot of this mess? Yes.

The root cause for the Greece debt explosion was a combination of a decade-long pre-existence of high structural deficits and high debt-to-GDP levels.  It happened well before the Lehman/2008 collapse.

Fact: During the six years from 2004 to 2009, Greek government expenditures increased by 87% against an increase of only 31% in tax revenues.

Fact: The retirement age used to be 55 years in Greece but was increased to the current 57 years for a full pension.

Fact: For decades, Greek governments paid civil servants bonuses for showing up to work on time and 14 months' pay for Christmas. Retirement averaged at 53 years of age for civil servants.

To suggest that the Greek government has been totally responsible and without fault is buying the bullshit narrative that they WANT you to believe.

chunga's picture

double click again dumbell

MansaMusa's picture

Change that inbred backwoods flag you turd !

disabledvet's picture

"The Flag of Why Hyperinflation Sucks."

Might have to pick up a few myself!

Calmyourself's picture

Back to huffpo asshole where you can be terminally offended..

Model T's picture
Model T (not verified) MansaMusa Jul 1, 2015 3:26 AM

The flag represents States Rights; as opposed to Lincoln's War on the States to obtain a state of submission and obediance to central authority; not what the Consitution was about. Too bad you're so easily misled by propaganda. Try reading a book some day.

Portuguese Revolutionary's picture

If only there were 7 billion rational people in the world...

knukles's picture

Then you and I would be totally misunderstood. 

tdogg's picture

The problem is Wall St & their ilk think they are bad-ass gangsters, and think they can act in kind.  

Hey Wall St - stop watching GoodFellas  & pretending you are all that.  You ain't  - not even close.

Now go shine my fu#@King shoes.

 

https://www.youtube.com/watch?v=ZPtjyqgZAUk

mkkby's picture

Greece:  My offer is...  nothing.

Colonel Klink's picture

Jews like to think they're Goodfella gansters until they actually come across some badasses.  Then they usually go up in smoke.

Crash Overide's picture

So there you have it, Greece defaulted... derivatives meltdown next?

Wasn't the world supposed to end?

The illusion seems continue, nothings changed, thank you sir may I please have another...

Crash Overide's picture

Fiat money/debt IS the great illusion.

Free your mind.

joseJimenez's picture

What does IMF stand for?  ah yes!!  The Imperial Ministry of Finance.  Which is a long winded title for the enforcer

iClaudius's picture

Problem is the banksters are in Germany this time. Would be fun to watch though.

Griffin's picture

In Iceland, the whole banking system crashed in a time span of a few days, the currency, the Icelandic krona fell ca 50 percent, the stock market fell by 90 percent.

I think that if Greece wants to return to growth, then it will be necessary to get rid of the euro.

I suppose the most sensible option to chose would be the one where Greece has a future as a free independent country.

I think other countries should consider the possible advantages of leaving the currency union, since it should be clear by now that the current setup is not going to work out for a lot of smaller economies.

Of course, if the EU really wants to repair the European economy, then they should start by kicking Germany out of the euro.

 

 

 

 

 

 

John Wilmot's picture

Greece is not Iceland (unfortunately).

Iceland is a relatively free country, while Greece is a socialist clusterfuck.

Economic Freedom Index (out of 178):

Iceland = 26

Greece = 130 (worse than Nigeria, for instance)

Security of Property Rights Index (out of 97):

Iceland = 21

Greece = 50

Ease of Doing Business Index (out of 189):

Iceland = 12

Greece = 61

Iceland allowed debts to liquidate, markets to clear, and resources to be reallocated, thereby rebuilding the economy on a more sound foundation. The Greek economy won't be able to do that, being much too heavily regulated, controlled, planned, subsidized, nationalized, unionized, and taxed. These restrictions will prevent (or at least greatly slow) the readjustment process.

seminal1's picture
seminal1 (not verified) Griffin Jul 1, 2015 12:29 AM

There is a big difference between Iceland and Greece.

Greece has been building up their national debt for quite some time on their own. Iceland is a case of private irresponsibility at private expense while Greece is more of a case of public irresponsibility at public expense.

Iceland's crisis was triggered by the failure of "private" banks; they had no national debt problem. They're also on a free-floating currency, which was collapsed to boost the country's export power (at the cost of significantly reduced buying power at home -- aka, it's like lowering everyone's salaries and flipping a lot of people upside down on their mortgages). Iceland refused to insure the losses of their banks, but did take huge loans (and implement austerity) to help restructure them during the bankruptcy proceedings; the banks are now worth enough to sell off assets to pay for their debts (although the UK and Netherlands still are suing over the delay).

Dick Buttkiss's picture

Yes, default, as in Greece and the rest of the the world's money and banking system, is de falt of those who created it, have enriched themselves countless times over on account of it, and will bring the global economy to its knees for having done so.

They are prepared.  Are you?

invisible touch's picture
invisible touch (not verified) joseJimenez Jun 30, 2015 3:57 PM

new drachma case n° 5 will never happen because of devaluation 24h after official launch... ruining greek to absolute zero.

 

sorry tyler, there is only 4 cases. and you can remove also the dual money system locked to euro because nodoby outside of it would be garanty to ever be locked, ( just like debt never paid back... )

so there is only 3 possiblities.

 

and if you apply grexit, confidence crisis leads europ to crack and break in parts so you can remove it too, there is only 2 cases, in both cases, they keep euro as currency.

 

you will see.

invisible touch's picture
invisible touch (not verified) invisible touch Jul 1, 2015 4:16 AM

ho there are 12 idiots who don't get it, or refuse to see reality.

 

in my prevous form in this forum i always said, exit is not allowed.

 

you will see...

Faustus's picture

kaiserhoff, that sounds reasonable, but I wouldn't bet on that. Merkel, Schäuble, and Juncker are Euro fanatics. Their political future depends on saving the Euro. You cannot hope for rational decisions under these circumstances. Or do you have any insider information that actually "Germany has decided to pull the plug"?

kaiserhoff's picture

Just reading tea leaves.  Merkel is personally shooting down any cheerful nonsense coming out of Greece, within minutes.

The alphabet soup of agencies and intermediaries seem to be out of the loop, and backing off.  Back to the nation states, as it has been for the last few hundred years.

cougar_w's picture

Schauble wants Merkel to die over this. Junker is insane with power. Those two will save the Euro but only because it is their tool for creating a kind of monetary Fourth Reich . And that is about as rational as any of this is going to get for a while.

unicorn's picture

Merkel has a 60 000 Mio Problem if she doesnt save the greeks. anyhow..