"Reforms are needed, but not only in Greece"

July 10, 2015

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.

Hung Tran is Executive Managing Director of the Institute of International Finance (IFF) which acts as a global association of nearly 500 financial institutions. Prior to his work for the IFF he served as Deputy Director at the IMF and held various positions at Rabobank, Deutsche Bank, Merrill Lynch and Salomon Brothers.
Hung Tran is Executive Managing Director of the Institute of International Finance (IFF) which acts as a global association of nearly 500 financial institutions. Prior to his work for the IFF he served as Deputy Director at the IMF and held various positions at Rabobank, Deutsche Bank, Merrill Lynch and Salomon Brothers.

The IMF’s credits go mainly to developing countries. What does it mean for the IMF if a developed country like Greece fails to pay back its debts?

The IMF has provided EUR 21 billion to Greece. Although this is a considerable sum it is only a limited portion of the IMF’s total lending capacity of $422 billion and won’t jeopardize its operations. 

 

Do you already see any spillover effects of the Greek debt crisis on the international markets?

After the missed payment we saw a bit of volatility in the markets, but all in all very limited. The economic impact is also rather limited until now. Greece contributes less than 2% to the Euro Area GDP.

Of course the consequences for Greece could be disastrous if an agreement can’t be reached and the financial system collapses, leading to Greece's exit from the Euro Area and a possible humanitarian crisis.

 

Do you have any recommendations for the Eurozone to avoid this in the future?

In general economic recovery in the Eurozone has gained traction. To make this recovery sustainable in the longer term, structural reforms are needed, not only in Greece but throughout the entire Eurozone.

Wim Van Aken

The Greek government debt amounts to EUR 319 billion, which is divided between 5 “creditors”:

  • 62% - Eurozone governments
  • 17% - Private sector
  • 10% - IMF
  • 8% - ECB
  • 3% - Greek National bank
Source: Allianz Global Investors

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