Summary: At the last review in May 2014, Greece’s public debt was assessed to be getting back on a path toward sustainability, though it remained highly vulnerable to shocks. By late summer 2014, with interest rates having declined further, it appeared that no further debt relief would have been needed under the November 2012 framework, if the program were to have been implemented as agreed. But significant changes in policies since then—not least, lower primary surpluses and a weak reform effort that will weigh on growth and privatization—are leading to substantial new financing needs. Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable. This conclusion holds whether one examines the stock of debt under the November 2012 framework or switches the focus to debt servicing or gross financing needs. To ensure that debt is sustainable with high probability, Greek policies will need to come back on track but also, at a minimum, the maturities of existing European loans will need to be extended significantly while new European financing to meet financing needs over the coming years will need to be provided on similar concessional terms. But if the package of reforms under consideration is weakened further—in particular, through a further lowering of primary surplus targets and even weaker structural reforms—haircuts on debt will become necessary.
Nine Key Questions on Greece
In May 2010, the IMF approved €30 billion in financial assistance for Greece under a Stand-By arrangement to support the country’s economic reform program. In March 2012, the IMF approved €28 billion (or $36.7 billion) in financial assistance for Greece under an extended arrangement to support the country’s economic reform program. To date, Greece has €21.2 billion in outstanding obligations to the IMF.
A repayment of about €1.5 billion was due to the IMF under the stand-by arrangement on June 30, 2015. That repayment was not made when due.
Here are answers to key questions about the IMF’s financing to Greece.
Greece: Preliminary Draft Debt Sustainability Analysis
- QUESTION 1. WHAT WOULD THE IMF LIKE TO SEE HAPPEN TO RESOLVE THE SITUATION?
- QUESTION 2. WHAT HAPPENS TO GREECE BECAUSE OF THE FAILURE TO MAKE A REPAYMENT WHEN DUE?
- QUESTION 3. IS THERE A GRACE PERIOD?
- QUESTION 4. CAN A PAYMENT BE POSTPONED?
- QUESTION 5. HOW DOES THE IMF WORK TO RESOLVE OVERDUE PAYMENTS?
- QUESTION 6. ARE THERE PENALTIES FOR A FAILURE TO REPAY?
- QUESTION 7. WHAT DOES BEING IN ARREARS TO THE IMF MEAN FOR GREECE’S OTHER CREDITORS?
- QUESTION 8. IS THE IMF’S ABILITY TO FINANCE OTHER MEMBERS HURT BY THIS NON-PAYMENT?
- QUESTION 9. WILL THE IMF’S SHAREHOLDERS SUFFER LOSSES IF GREECE DOES NOT REPAY?
Q1. What would the IMF like to see happen to resolve the situation?
The IMF’s priority remains helping the Greek people through this difficult period of economic turmoil. IMF staff believes that the best way to do this is through the balanced approach laid out in a recent blog by the IMF’s Chief Economist, with Greece taking steps to reform its economy and the country’s European partners providing additional financing and debt relief. As stated by IMF Chief Christine Lagarde, the IMF stands ready to pursue this approach with the Greek authorities and our European partners.
The IMF knows through experience working with its many members that economic change is hard and takes time. This is where the IMF’s financial support comes in, providing a government with the space needed to carry out reforms over time, in a way that protects the most vulnerable and strengthens the economy.
Q2. What happens to Greece because of the failure to make a repayment when due?
The immediate effect is that Greece can no longer receive financing from the IMF under the existing extended arrangement and the IMF will not approve new financing to Greece until it clears its arrears. This is standard procedure when a member fails to repay the IMF. The IMF’s Selected Decisions, 37th issue, page 912, spell out the procedures for a failure to repay and apply to all of its 188 members.
Greece remains a member of the Fund, with voting rights and representation on its Executive Board. The IMF’s annual health check of a member country’s economy (called surveillance) will continue to be an obligation. For the time being, Greece will also be eligible for IMF technical assistance — that is, access to IMF expertise on a range of economic issues, including tax administration and financial sector policies.
Q3. Is there a grace period?
There is no grace period. When a member country fails to pay its obligations to the IMF by the due date, it is in arrears. Under the IMF’s procedures, the Managing Director informs the Executive Board of the emergence of overdue obligations. Given the high profile of the Greek program, the Managing Director informed the Board immediately.
Q4. Can a payment be postponed?
A member country can request a postponement. The IMF does not extend payment terms as a matter of longstanding policy. Our goal is to work with a country to resolve their problems. More than 30 years ago, the IMF granted a few low-income countries delays at their request, but in each case the delay proved not to help with immediate financing needs or fundamental economic problems.
Q5. How does the IMF work to resolve overdue payments?
The IMF has a policy in place to work collaboratively with members to clear their arrears, spelled out in the IMF’s Selected Decisions, 37th edition. The IMF, guided by this framework, has been broadly successful in helping to restore a country’s access to financing. For example, between 1978 and 1989, 19 countries failed to repay and went into arrears to the IMF. With the exception of Sudan and Somalia, all of these members were able during this time period to work with the IMF to clear their overdue balances. The only country with protracted arrears incurred in the more recent past is Zimbabwe.
Q6. Are there penalties for a failure to repay?
The most immediate “penalty” is that the member can no longer receive IMF financing.
Within 12 months, the Executive Board may consider a declaration of ineligibility against Greece if Greece continues to incur arrears to the IMF. If the non-payment persists for more than 12 months, the IMF Executive Board may declare that the country is “noncooperative” in efforts to clear arrears, which could trigger a suspension of technical assistance, possibly followed by a suspension of voting rights and, ultimately—if the non-cooperation is extreme and protracted—compulsory withdrawal from the IMF. The timetable for these steps is flexible, as spelled out in the IMF’s Selected Decisions, page 912.
Q7. What does being in arrears to the IMF mean for Greece’s other creditors?
The implications of Greece accumulating arrears to the IMF are for other creditors to determine.
Q8. Is the IMF’s ability to finance other members hurt by this non-payment?
The IMF’s balance sheet is strong. With financing capacity at an all time historic high of about SDR 300 billion (US$421.9 billion or €377.1 billion), the IMF is well positioned to meet potential financing needs from other members.
Q9. Will the IMF’s shareholders suffer losses if Greece does not repay?
No, the IMF’s shareholders will not suffer losses.
Notwithstanding the overdue obligations, member countries’ claims on the IMF are fully secure and the IMF will continue to meet its obligations to members and lenders.