Greece probably has until late July to come to an agreement with its creditors. Possible delays in payments to the International Monetary Fund shouldn’t prompt the European Central Bank to shut off vital liquidity to Greek banks. By contrast, a default on marketable debt, specifically the failure of the Greek government to pay 3.5 billion euros due to the ECB on July 20, would probably force the central bank’s hand. The Greek government and its creditors are still likely to reach a deal on a list of reforms before that crucial date.
Greek banks are relying on liquidity from the ECB to avoid financial collapse. That support is currently provided by the Emergency Liquidity Assistance scheme from the monetary authorities in Frankfurt.
In the event of a sovereign default, the banks, which are large holders of Greek debt, would probably be ruled insolvent because the value of the assets on their balance sheets would fall sharply. Under the rules of the ELA, the ECB would be unlikely to be able to continue providing liquidity to lenders in the beleaguered country — users of the scheme must be solvent.
Rolling over Treasury bills of about 11 billion euros between now and July 20 is unlikely to create a problem, as long as ECB liquidity remains available. The debt management office will probably be able to complete those operations because Greek banks have continued to be loyal buyers of those assets.
A more pressing concern is a payment to the IMF. Greece must pay about 774 million euros on May 12.
Still, a failure to make that payment would be unlikely to cause the ECB to cut off liquidity to the country’s banks. Since the ability to pay depends on the ability to reach an agreement on reforms, that might be considered a matter of liquidity rather than solvency, allowing the ECB to keep funding Greek banks. In addition, the IMF wouldn’t even have to make a public announcement about the country being in arrears until three months have passed since the missed payment, though the country is immediately shut off from the Fund’s resources.
The IMF could still sign off on a “successful conclusion of the review” that would officially end Greece’s second bailout even if the country were in arrears. The four-month extension granted in February stipulates that this must be done by the end of June, though it’s a soft deadline. The “successful conclusion” would release the outstanding tranche of the current European Financial Stability Facility program — 1.8 billion euros — and the profits from the ECB’s Securities Markets Programme — 1.9 billion euros.
Those funds from Greece’s euro-area creditors, which sum to 3.7 billion euros, would be sufficient to repay the IMF about 3 billion euros that are due between now and July 13.
The IMF could then release the 3.5 billion-euro payment linked to the sixth program review after the second bailout is successfully concluded, as long as Greece is not in arrears to the Fund. That would cover the bond held by the ECB that matures on July 20.
In addition, the Fund could also accelerate the payments linked to the seventh and eighth reviews, which were originally scheduled to have been completed by Nov. 30, 2014, and Feb 28. 2015. That would provide an additional 5.3 billion euros. Those could be used by Greece to repay the 3.2 billion-euro bond held by the ECB that matures on Aug. 20.
Once Greece agrees on a reform program with creditors, it should be back on track to make it through the rest of 2015.