By bundling debt payments, Greece embraces a holdout strategy

By bundling debt payments, Greece embraces a holdout strategy

The latest move by the Greek government marks a shift in the way it is dealing with international lenders. Why this is the case, however, requires an understanding of the reasons behind the four-month deadlock between Athens and its creditors.

On June 4, Athens announced that it would bundle the 1.6 billion euros it owes to the International Monetary Fund (IMF) in June. As a result, Athens will not make the four payments it was scheduled to make this month, instead lumping these into a single payment on June 30.

Though this is allowed under IMF rules, it is a legal stipulation which has rarely been employed. This means that Athens has delayed the possibility of a default for three more weeks. At the same time, it further raises the pressure on the country since Greece will have to make a large payment by the end of the month.

Greek leaders embrace a holdout strategy

Since the beginning of the debt saga, Greece has been pushing for two demands. The first is a debt haircut, and the second is an end to what Athens’s far-left government labels as the ‘’vicious cycle of austerity’’ – i.e. a rejection of pension and labor reforms.

Both the EU and the IMF, who are the most important players of the Troika of lenders, have rejected both of Greece’s demands. Yet, the united front between the two major creditors is actually the result of a division.

Although the IMF is adamant about the need for pension and labor reforms, on this issue the EU is more open to compromise. What the EU and Germany oppose are demands for a debt haircut. This deadlock can trigger a particular dynamic if one of the creditors retreats on its core positions.

If, for instance, the EU begins to show a more conciliatory tone on a debt haircut, it is unlikely to concede on the issue unless the IMF shows a readiness to concede on its own core demands, and vice versa. The creditors can avoid any bargaining between them only if the Greeks proceed with a complete retreat. But at the moment such a scenario does not seem likely.

Greece’s postponement of IMF payments begins to make sense once we situate it within the above framework.

Specifically, by postponing such payments, the Greeks are putting pressure on the IMF to bargain for a debt haircut with the EU. They hope that such a move will in turn force the EU to bargain with the IMF for a revision of its core demands.

The Greeks have already expressed their demand for debt relief after the recent loan postponement, with Yanis Varoufakis, the former Greek finance minister, urging Germany to support Greece’s debt haircut demand, likening it to the United States’ decision to eliminate Germany’s own debts after the Second World War.

Short-term forecasts indicate the IMF will stall

Whether this strategy will work or not is unclear. The presence of the IMF was and still is an inhibiting factor. This is why Germany insists on keeping the IMF involved to counter what they perceive as the softness of the European Commission.

The IMF, however, has signalled that it is not insisting on explicit promises of debt relief immediately, so as not to scuttle a deal on short-term financing. These are uncharted waters, so nothing can be said on this particular issue. Nevertheless, a deal is likely to be reached at some point due to the systemic risk of not just a Greek exit, but also a Greek default.

It is hard to assess how investors will behave in such an event. But as recent events have made clear, the Greek government is not prepared to accept any more austerity, largely thanks to internal party pressures. June is the month when the extension of the Greek bailout comes to an end – it will be an interesting month, to say the least.

Categories: Economics, Europe

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