Whatever happens next the Greek people look set to suffer even more

Last night at 11 pm British Summer Time saw an event which the last five years have been building up to. From the International Monetary Fund or IMF.

I confirm that the SDR 1.2 billion repayment (about EUR 1.5 billion) due by Greece to the IMF today has not been received. We have informed our Executive Board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared.

Thus Greece finds itself in arrears to the IMF but I can confirm that the world has not ended!

However there are a lot of implications which in the IMF has implicitly admitted by the use of the word “arrears” as it avoid the word default. Some have argued that this is like missing a credit card payment but there are quite a few differences to that. For example penal interest-rates on the whole sum and missed payment fees and so on. Also credit card companies like you to run into arrears because as long as you actually repay they can rub their hands in anticipation of making a substantial profit out of you. The longer you take to repay the more money they actually make.That is not the business model of the IMF which lest we forget is supposed to put a country back on its feet so that both it and the individual country concerned can live happily ever after.


The IMF’s leadership now finds itself facing a problem I have warned about since June 2010.

Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong.

There is of course a supreme irony that the current head of the IMF Christine Lagarde is an ex-politician.

Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.

She now heads an organisation facing the largest non-payment in its history as a direct consequence of the way that she and her predecessor Dominique Strauss-Khan twisted the organisation into helping with Euro area fiscal problems.

We also face the consequence of some recent can-kicking as several IMF payments due earlier this month were bundled up in the hope that “something wonderful” might happen by the end of the month. Right now the IMF is left wondering about the 32 billion or so Euros it has lent in total. Due to the economic recession which of course was turned into a recession by a plan supported by the IMF it is unlikely to be able to repay those funds either.

So let is leave the IMF mulling how it is going to explain is largest ever arrears to its shareholders. In case you are wondering the UK is a little over a 4% shareholder.

Preferred Creditors

The IMF is a “preferred creditor” in that it is supposed to be repaid first. As it has not been in this instance that poses questions for the vehicle the Euro area uses to loan to Greece called the European Stability Mechanism or ESM. Not so stable looking today is it? Theoretically it is also a “preferred creditor” which seems now a bit like tilting at windmills.

European Central Bank

It now has an extra problem as it mulls the amount of Emergency Liquidity Assistance or ELA it has given to Greek banks. It imposes a haircut on the collateral it receives from the Greek banks in return for this and the obvious consequence of last nights default is that it should increase the haircut. Here we see an example of a rock meeting a hard place as there is not only doubt about whether Greece has enough collateral for current ELA levels its banks would like more of it.


There were all sorts of strange stories yesterday. Perhaps the most bizarre was a claimed offer of help from Turkey! The Greek government also got in on the act as Prime Minster Tsipras made a new proposal to the Euro area. According to the Financial Times he has taken this a step further today.

Mr Tsipras’ letter says Athens will accept all the reforms of his country’s value-added tax system with one change: a special 30 per cent discount for Greek islands, many of which are in remote and difficult-to-supply regions, be maintained.

On the contentious issue of pension reform, Mr Tsipras requests that changes to move the retirement age to 67 by 2022 begin in October, rather than immediately. He also requests that a special “solidarity grant” awarded to poorer pensioners, which he agrees to phase out by December 2019, be phased out more slowly than creditors request.

So it appears that he has blinked first but as I pointed out only last Thursday there is a problem with such a move.

However its analysis of the impact of a fiscal consolidation has a chilling implication for the austerity package which the Greek government has just proposed. The impact will be to reduce GDP by 1.5% to 2% this year and to reduce it by 3-4% next year!

So we return to a problem which so far in the Greek crisis has failed to find a solution. In return for the loans and credit Greece needs the creditors always want more austerity which shrinks its economy and makes it ever less likely the loans will be repaid. It also leads to more demands for austerity in a cycle which so far has been endless.

The Eurogroup

If the media wires are any guide this body seems to be singing along to Tom Petty and the Heartbreakers.

Well, I won’t back down
No, I won’t back down
You can stand me up at the gates of hell
But I won’t back down

No, I’ll stand my ground, won’t be turned around

They are formally meeting at 5:30 pm Brussels time but it is hard not to wonder why? After all they show no sign of changing their position. It does not seem to bother them that its very nature is not only destructive it is self-destructive.


This saga continually plumbs new depths. On the one side we have the institutions or creditors insisting on programs which will further shrink the Greek economy. They of course do their best to deny this and are willing to rewrite history to do so. From the head of the ESM Karl Regling.

Due to the economic policies adopted under the EFSF programme, the country was on a good path towards strong growth until the second half of 2014. The many sacrifices which the Greek people had to make were paying off…… According to the OECD and World Bank, Greece was a reform champion until 2014, with encouraging growth prospects.

“Reform champion”? “Encouraging growth prospects”? That is before we consider his omission of what the “economic policies” have done to Greece’s economy. They will do it again.

As to the Greek government it now faces the problem of people wondering exactly what its modus operandi is? It badged itself as anti-austerity but now is willing to give a lot of ground on that front.

The losers yet again are the Greek people who I feel dreadfully sorry for as this shambles will affect them materially and they have already suffered on a grand scale. Let us hope that Tom Petty was right below.

Baby, even the losers get lucky sometimes
Even the losers keep a little bit of pride
They get lucky sometimes


39 thoughts on “Whatever happens next the Greek people look set to suffer even more

  1. Shaun, the ESM statement is another piece of propaganda to insinuate that everything was fine until you voted for Syriza. Regime change is the objective of ‘Europe’ and a puppet government installed in Athens. Let’s hope the Greek people can see through this.

    • Hi Pavlaki

      I found it to be simply extraordinary and from an alternate universe.

      “the positive results of the programme are put at risk”

      “These favourable lending conditions provided Greece with budgetary savings of over €16 billion for 2013 and 2014 combined. That corresponds to more than 4% of Greek GDP in each of the two years.”

      Oh yes Greek GDP what did happen to that?

  2. So what is the reasoning in calling Greeces position “arrears” and not “default” ?
    Would the payouts on default insurance have broken the system?

    …and Merkel said only yesterday that there would be no more negotiations until after Sunday’s referendum. Seems like nobody’s interested in her opinion. Too many chiefs…!?

    • Hi Tim

      I was only discussing yesterday what use the Credit Default Swap market is when the concepts of default has changed so much.

      As to a specific answer the use of “arrears” allowed the ECB to kick the ELA issue to at least next Monday. From the FT Online

      “The European Central Bank has kept Greek banks’ access to emergency loans frozen at just under €89bn.

      The ECB’s governing council did not take a decision whether to impose tougher haircuts on the Greek government bonds and government-backed bank debt which the country’s biggest lenders are using as collateral for their Emergency Liquidity Assistance, or ELA, from the Bank of Greece, reports Claire Jones in Frankfurt.”

  3. Hi Shaun
    I think the words of Duran Duran apply to the
    Greek people and TPTB.

    But I won’t cry for yesterday
    There’s an ordinary world
    Somehow I have to find
    And as I try to make my way
    To the ordinary world
    I will learn to survive

    But will they?


  4. Perhaps Tsipras hopes to form the govt. AFTER NEXT, when he may well get a majority of the votes cast.
    If not, he’s a coward.

  5. Great column, Shaun, as usual. To complement your closing remarks, here is a video of the pride of Gainesville, Florida singing “Even the Losers” in 1986, when we were still talking about the ecu and not the euro:

    Happy Canada Day!

  6. Will this trigger any of the more restrictive CDS contracts on Greek Bond debt? It’s been a while since I looked at the definitions of XR, MR etc., or do we have to wait until a failure to pay a Greek Bond coupon?

    I seem to recall some CDSs on corporates would trigger if any payment of any kind was missed.

    • Hi Bootsy

      It had me wondering but ( h/t Adnan Chian) “Greece non-payment to the IMF does not trigger CDS. This is because the IMF repayments refer to debt incurred before 1 February 2012, …which is the cut-off date in the new CDS contracts for Greece after the 2012 PSI.”

  7. Hi Shaun, I’ve been watching this closely all year and now we are here. This position seemed inevitable to me a couple of weeks ago and now I have no idea of what the next events are likely to be, probably not market meltdown but certainly big falls with impacts on confidence, possibly followed by consumption reductions and thence global GDP.

    On a smaller technical scale I suppose the IMF will go through some sort of “arrears warnings letters” procedure? But how long will that o on for? and then what? What if Greece votes for acceptance of the new proposals which have now been withdrawn? What if Greece votes for rejection but insists on remaining in the Euro?

    I have only questions and probably 10 more questions to any answers that are provided. That’s what happens when you enter uncharted territory, still, Greece is now trail blazing a new path which will presumably set precedents for any other countries getting into this kind of mess in the future.

    • What if Greece insists on remaining in the euro ? I’d point out that Kosovo uses the euro as a de facto currency, despite lacking a formal agreement with the EU.

      Ergo Greece can use the euro as it’s official currency, and Brussels can’t do anything about it.

    • Hi Noo2

      Yes we are in the era of a strongly worded letter from the IMF followed a fortnight later by an even more strongly worded letter if I recall correctly. If only Nigel Hawthorne was still alive to play an IMF Sir Humphrey……

  8. income : 65 billion euro http://www.oecd.org/ctp/tax-policy/revenue-statistics-and-consumption-tax-trends-2014-greece.pdf

    I’d like to see a current expenditure breakdown, I could only find a 4 year old breakdown – http://t-government.blogspot.com/2011/06/greek-budget-visualisation-where-do.html

    If we assume Greece defaults. Without loan payments, can the Greek govt keep enough services functioning and civil service salary & pensions paid ?

      • Thanks. Eurostat data on Greece has been incorrect previously. In theory Tsipras could cut military and eliminate all debt payments and have enough money to run the country. But there are also cashflow challenges and risks to stability if Greek banks disintegrate. But I note that KCB cashpoints are lit up and appear to be open, so Tsipras should try to keep calm and carry on.

  9. Hello Shaun

    So the IMF loans will be paid by the ECB and then forgotten about , or renamed , because if Spain Ireland or portugal get to hear then there’s going to be troubel!

    Banks for the Banks , pay off one bank loan wiht anohter

    Remeber EU is not negotiable !


    • A very interesting theory. And those in charge of the ECB won’t want the US justice system “following the money”.

      WTA trade disputes have been fought over state aid to airbus & boeing. Do you think this counts as illegal state aid to various eurozone banks ?

    • Renamed like Troika becomes ‘creditors’, ‘default’ is now ‘arrears’. All very 1984 if you ask me.

    • Hi Chris

      I wouldn’t be surprised if we saw moves in both directions. The Chinese will certainly be looking for opportunities here although as their economy wobbles they may be otherwise engaged.

  10. “Also on Wednesday, officials with the European Central Bank (ECB) are due to decide on whether to demand more collateral from Greek banks on emergency loans it has given them.”
    This isn’t how it works.
    The deal is, you decide what collateral is required PRIOR to agreeing a loan.

  11. Shaun, on a different subject; a nasty piece of legislation came into effect in Spain today. Called the Citizens safety act it is in effect a gagging law to prevent peaceful protest. You can no longer photograph a police officer (even in the case of police brutality) defaming the government will be fined etc etc.. It’s like something from the Franco era. And what have the EU had to say about it? Nothing as far as I can see. Democracy takes another beating in order to shore up a compliant government.

  12. “The losers yet again are the Greek people who I feel dreadfully sorry for as this shambles will affect them materially and they have already suffered on a grand scale”

    It must be remembered though that they are very much the masters of their own downfall by voluntarily joining the Euro (although they didn’t meet the criteria) and then going on a public and private spending binge fuelled by the low interest rates of a stable currency. Then taking bailout money to keep things upright for a few more years. And now they want debt writedown but with national pride demanding they be allowed to continue within the Euro. I saw figures some time ago indicating that greece has defaulted something like 12 times in the last 150 years. They have a long established tradition of operating their economy in such a way that there was high inflation and a permanently falling Drachma. It was ridiculous to believe that within a few years they would suddenly become Germanic. All that said I do feel sorry for young greeks who are being hammered by extreme unemployment, very limited state benefits not to mention any money they do have being unavailable from their bank accounts at present. They must see a terrible future ahead. However until they and the rest of the population accept they can’t function properly within the (relatively strong) Euro there can’t be any lasting solution.

    • Hi Redshift and welcome to my corner of the web

      I think that it is important to distinguish between the Greek establishment who are guilty of the things you mention and the ordinary Greek who is/was not. As ever it is the ordinary person who is left to do the suffering.

  13. Hello

    I have been looking at your webpage for a while and as I am not an economist I only understand about a third of what is being discussed (OK maybe a fifth) however I think you are wrong about the related songs
    The song you want to reference is ‘tunnel of love’ by the Fun boy three. I remember this song from the 80’s as I was in lust with the gorgeous blonde on Drums

    the relevant lines are:

    There are 22 catches when you strike your matches (in this case 19)

    The trail separation worked and ended up in a divorce case

    I suspect with Greece there is some sort of trial separation on its way. The politicians will give it a fancy name, both sides will go away and pretend to ‘work on things’ before the extremely messy and public divorce (6 months tops). it will give the Greek people false hope and give everyone else time to unload their bad debt, if they haven’t already done so.

    I work a lot with the Spanish and during informal discussions with them they all say the same they do not want to leave the Euro, its is their future. I suspect that as the Franco dictatorship is so recent in their history that what Europe offers is far better than the alternative they fear.

    Britain I think has an undeserved reputation in Europe. In the Company I work for, it is like the united Nations, we have virtually every nation represented at least once. I Spoke with a few French who could not get a job in France, they were told go to over to England, you will find a job there no problem – they have been here for the past twelve years. So Britain is a good European but I will still vote to leave

    On an unrelated topic. when the Irish had their little problem, the Irish Government ‘borrowed’ some money from a pension pot. Did that money ever get put back in the pot or has it been forgotten?

    One final question

    At some point would you be able to compile an unbiased dummies guide to the economics of staying or leaving Europe? That would help me a lot

    Thank you

    • Hi Nigel

      You had me wondering about the National Pension Reserve Fund in Ireland. The good news is that it is back up to around 21 billion Euros albeit that some of that depends on bank valuations. However it has now become the Ireland Strategic Investment Fund with the objectives below.

      “The dual mandate of the ISIF – investment return and Irish economic impact – represents a new “double bottom line” approach to investing and will require all transactions to generate both risk adjusted commercial returns and economic impact in Ireland.”

      “The assets of the National Pensions Reserve Fund (NPRF) became assets of the ISIF on the ISIF’s establishment (except for assets governed by foreign law which remain NPRF assets until their transfer). €7.5 billion in the NPRF “discretionary portfolio” is available for investment in accordance with the ISIF’s objectives. €13.6 billion in the NPRF’s “directed portfolio” will continue to be managed at the direction of the Minister for Finance.”

      Where that leaves future Irish pensioners I am not so sure…..

  14. Nigel, Shaun has looked quickly at the Europe position here – https://notayesmanseconomics.wordpress.com/2015/06/25/what-are-the-economic-consequences-of-the-uk-leaving-the-european-union/

    although, he has only quoted selected numbers. I would have preferred he quoted annual aggregates rather than monthly numbers as they can be very distorted. He also doesn’t state the numbers that matter in this argument – what percentage of the individual countries aggregate GDP is traded with the UK. Billions sounds like a lot but if you consider UK GDP is circa £1.5 trillion, losing a couple of billion of that number is small beer (about 0.15%) and no country would lose ALL it’s exports to the UK in the event of a Tariff war.

    My point is they may just be prepared to kick the UK out and take the pain of a small loss in exports to the UK. How the UK would fare with a substantial loss of exports to all the EU countries is a subject that requires in depth analysis imo, including forming a view as to whether the UK would likely replace the lost exports with exports to other countries or divert those activities to replace those imports from the EU it had given up.

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