What happens when a nation defaults? As the Greek crisis deepens, that’s the question on everyone’s minds. Open Knowledge asked the Executive Managing Director of the Institute of International Finance, Hung Tran, for his view on how the situation could unfold – and what can be done to prevent it from happening again.
Open Knowledge: What makes the Greek debt crisis special compared to defaulting states from the past, like Argentina for example?
Hung Tran: There are two aspects: First, previous defaults happened to emerging markets like Argentina or Russia. Greece is a developed economy and a member of the EU. Second, Greece is also part of the Eurozone, which means it doesn’t have access to monetary instruments to rectify the situation (e.g. devaluation) but has to adjust through internal economic adjustment and social reforms.
If Greece defaults, what are the next steps for the creditors?
The term “default” is a very specific legal term and we have not reached that point yet. Greece has missed a payment to the IMF, and is therefore in arrears to the Fund, but technically it will have time to have a discussion with Fund staff to rectify the situation. The Credit Rating Agencies do not regard non-payment to the IMF as default to private creditors. A critical moment will be the payment of EUR 3.5 billion to the European Central Bank on July 20th. If Greece fails to pay back to the ECB, it will be hard to justify the access of Greek banks to liquidity (provided by the Central Bank of Greece with authorization from ECB through the Emergency Liquidity Assistance (ELA) facility). This would cause serious liquidity problems for the Greek banking sector.