Finance Minister, professor and, apparently, pinup. Photo by Jasper Juinen/Bloomberg via Getty Images.
This isn’t a default.
Yes, Greece had a €305 million loan repayment due to the IMF today. No, it won’t make it. But it isn’t a default! The IMF made a nifty little rule in the 1970s that lets debtors “bundle” all debt payments due in a calendar month into one easy payment, due the month’s last day. According to the IMF’s chief spokesman, this eases “the administrative difficulty of making multiple payments in a short period.”[i] Greece announced yesterday they’ll do just that, paying all €1.6 billion due this month on June 30. Assuming they have the money, of course—whether they do or don’t, global market risks appear tiny. For investors, after five-plus years of Greek wrangling, this is mostly a political spectacle.
The IMF has urged Greece to take advantage of bundling for ages now, but officials demurred, lest Greek citizens assume it means Greece’s official pockets are empty, Grexit is nigh, panic, and start a bank run. Why change their mind now? Heck if anyone actually knows. Those with their ear to the ground say it is a “warning shot,” Greece’s way of saying “hey we will default if you troika people don’t play nice, we mean business, so there!” Some call it game theory, citing Finance Minister and erstwhile econ prof Yanis Varoufakis’ area of expertise and longstanding admiration of the late, great John Nash. And hey, maybe! After all, officials have long claimed they had the €305 million, so it isn’t like they had to punt. Then again, Greek officials have also said they would consider bundling if they believed a bailout funding deal was close, so maybe this is just a supremely bizarre attempt to instill confidence. A little chest-pounding “we won’t just pay millions here and there, we’ll pay €1.6 billion all at once, we are that awesome!” Who knows. Don’t read into it—just enjoy the theater.
The fun doesn’t stop there. Parallel-loving pundits found a doozy, discovering Greece is the first country to bundle since—wait for it—1980s’ Zambia! Oppressed, corrupt, vote-rigging dictator-ruled, hyper-inflating, hugely indebted, unstable Zambia, which entered an IMF structural adjustment program (loans for reforms) in the 1980s.[ii] The good folks at The Guardian went one further, compiling a list of every country that fell into “protracted arrears” (six months past due) with the IMF since the late 1950s. Should Greece join that list eventually, it will join esteemed company such as Cuba, Cambodia, Nicaragua, Guyana, Chad, Vietnam, Sierra Leone, Sudan, Liberia, Tanzania, Zambia, Gambia, Peru, Jamaica, Somalia, Honduras, Panama, Congo, Haiti, Iraq, Dominican Republic, Bosnia and Herzegovina, Yugoslavia, Central African Republic, Afghanistan and Zimbabwe. No developed economy, everyone is quick to note, has ever fallen into arrears or even bundled payments. We are told this is a “watershed” moment—though I wonder if these folks remember Greece was downgraded to “Emerging Market” by MSCI in 2013.[iii] The “no developed country” streak is intact.[iv]
Greece’s payment delay/bundling doesn’t really change much. For all the politicking that may or may not be behind it, it is a paperwork shuffle. It conveniently aligns the IMF due date with its bailout funding do-or-die date, giving Greece its umpteenth “critical make-or-break deadline.” That gives Greece and its creditors (the ECB, IMF and eurozone governments)—formerly the “troika,” now the “Brussels Group”—25 days to make nice and hammer out a deal. Or it gives Greece 25 days to raid the rest of its pensions, state-run firms and a shipping magnate or two. According to The Wall Street Journal’s handy Greek debt payment calendar, Greece must also roll over €5.2 billion in short-term Treasury bills between now and then—not impossible, but with two-year yields currently north of 20%, yowza.
Where they go from here, who knows. In the old days we would have pontificated about the high incentives to compromise on both sides and politicians having spent too much political capital to let the whole thing blow up now, but Greece’s government aren’t your average politicians. These aren’t the career politicians that joined PASOK or New Democracy straight out of school and made a living pandering and bargaining. They’re professors and businessmen and workers—private-sector recruits, drafted by populism into the political sphere. They haven’t spent decades honing the hard-bitten sociopathy required to survive in politics. They’re fresh-faced and principled. Heaven help them, they might even be honest. They want to stick to those campaign pledges and respect democracy! Respect the votes! Respect the people! Principles and politics often don’t mix. Cynical, I know, but true. Survival instincts might prevail in the next 25 days, but PM Alexis Tsipras and Varoufakis haven’t done much to convince me they are the type to concede to austerity demands and then try to sell it to voters as a win or even a sorry-we-had-to. I mean, they’ve tried, and it resulted in some funny Tweets, but also scathing backlash from Greeks and their own back-benchers. They’ve doubled down on principle since.
But they are at the negotiating table, and hey, you never know! Apparently they’re trying to find middle ground between “dueling proposals,” which gives me mental images of sword-fighting stacks of paper. Despite both sides’ vehement proclamations that the other side’s proposal is a joke/insult/(insert preferred noun here), there is some common ground. They agree on surplus targets, just not how to meet them. They agree on VAT hikes, just not on the how or the how high. They agree on pension reforms, but not the specifics. Greece and the IMF are pushing for some debt forgiveness, but the eurozone refuses. With 25 days to haggle, they could get there (or not).
In the meantime, the fun continues. Tsipras continues cozying up to Russian “President” Vladimir Putin, either in search of funding or to scare eurozone leaders, depending on whom you ask. Apparently their conversation yesterday centered on Greece’s aspirations to participate in the BRICS bank—the development bank spearheaded by Brazil, Russia, India, China and South Africa—but no word on whether Greece wants to participate as investor or recipient. The BRICS bank is geared toward helping developing countries, and Greece does technically fit the bill, and “BRICS Bank bailout” has some alliterative charm.[v] Tsipras also got grilled by Parliament Friday, and back-benchers are threatening to dissolve the coalition and force new elections if he cedes a single point to Brussels. (Bloomberg's Leonid Bershidsky has some excellent commentary on how Greek voters feel about all this.) Round, round and round they go.
As for markets, I refer you to our recent commentary, which shows how Greek and global markets are diverging—a sign that while markets anticipate some form of credit event in Greece, they see minimal risk of contagion. Yields in Portugal, Ireland, Italy and Spain have barely budged from historically low levels. Their debt insurance costs are rock-bottom, even as Greece’s fly through the roof. World and eurozone stocks are up while Greek stocks are down. Markets are very good at discounting widely known information. Greek markets don’t know something world markets don’t. The risk of spillover from whatever might go wrong in Greece is tiny.
So watch the goings on if you’re into political intrigue, but don’t panic about stocks. They have long since moved on.
[i] I guess Greece will be spared the hassle of bending over four times to scrounge for spare change in the sofa cushions? Less back pain?
[iii] We occasionally call it a Submerging Market. Compatriots in that category include Argentina and Venezuela.
[iv] Yes, I’m being subjective here, considering the OECD didn’t follow MSCI’s lead. But isn’t the story more fun this way?
[v] Heck, consider the potential headlines if the BRICS bank bails out Greece in lieu of the EU. Like, “In Bailout, BRICS Bank Bests Brussels.”