Weekend Economists Piece for Peace April 3-5, 2015

[Demeter]

30. Greece Threatens to Miss IMF Payment, Issue Drachma (Updated) (NOT APRIL FOOLS?)

http://www.nakedcapitalism.com/2015/04/greece-plans-miss-imf-payment-issues-drachma-threat.html


Greece has decided to up the ante in its negotiations with the Troika. The open question is whether the latest move, the press leak via Ambrose Evans-Pritchard at the Telegraph that Greece will miss its April 9 payment to the IMF so that it can continue to make pension payments, and has started to make plans to issue the drachma, are game-changers that Greece hopes they will be. The sources that spoke to Evans-Pritchard said that the government would be out of funds on April 9, the IMF due date. Note this is earlier than the most recently leaked drop-dead date of April 20. The Greek government cannot make that payment and also make pension and government salary payments due April 14. Keep this in mind:

Investors have recognized that a Grexit was a possible outcome; indeed, the financial press was treating it as a far more likely outcome than the political press. With Greece running out of money, discussion of that possibility increased last week, with Warren Buffett even saying a Grexit could be good for the eurozone versus serious pundits like Martin Wolf warning that a Grexit would pave the way for other countries to leave. But even Wolf held out the option of a managed Grexit so as to reduce the dislocation. So the idea that Greece might leave is hardly news. And Greece has made veiled threats officially, along the lines of, “We can only be pushed so far.” The question is whether the markets have really priced that in, since an adverse market reaction would give Greece more leverage. Despite the dramatic sound of invoking the “d” words, so far, this is a bluff. Read the first paragraph of the Telegraph account:

Greece is drawing up drastic plans to nationalise the country’s banking system and introduce a parallel currency to pay bills unless the eurozone takes steps to defuse the simmering crisis and soften its demands.

If you read the article, Greece has yet to take a single concrete step towards issuing drachma, the most important being to impose capital controls.

Market reactions will be influenced by Eurocrat actions and messaging. Here Greece has given the officialdom a full four days, since Friday and Monday are holidays in non-Christian Orthodox Europe, to plan a response. No developed economy has defaulted on the IMF, but the flip side is IMF payment dates are loose. In fact, the Telegraph reports that it is a full six weeks after a non-payment before Greece would be declared to be in technical default, so the April 9 date is not an event horizon. Moreover, Greece was already up against an end-of-month deadline to conclude its bailout fund negotiations, so missing the payment in and of itself does not change the overall timing parameters. Note some analysts worry that there could be more serious knock-on effects. For instance, we have this dire take in the Ambrose Evans-Pritchard account:

Bank of America warned that a “critical sequence of events could unfold” once Greece misses a payment to the IMF. It would trigger a parallel default to the eurozone bail-out fund (EFSF) under the legal master agreement, and might force the EFSF to cancel its loan packages and demand immediate repayment. This in turn would trigger a default on Greek government bonds issued under the bail-out accord.

Since it highly unlikely operationally, given the long weekend, for the Troika to approve the reforms and then get Eurogroup approval to release the bailout funds, it seems more likely that the IMF would determine what sort of short-term fudge it needed to engage in so as not to trigger a default under the EFSF. Again, since there were doubts that Greece would be able to make all of its March IMF payments, it may well be that some “extend and pretend” gambit has already been pre-planned...The leak will accelerate the bank run. One correspondent pointed out in February that anyone who was keeping deposits in Greek banks was a fool. Those who relied on the government statements that they were committed to remaining in the Eurozone will be forced to reassess, and if they have an operating brain cell, will drain their accounts.

MORE ANALYSIS, BUT NO CONCLUSIONS, AT LINK