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What Happens If Greece Defaults on IMF?

June 29, 2015
Only one country has ever been kicked out of the IMF -- the former Czechoslovakia, in the 1950s.

WASHINGTON—Greece could take a risky step into the unknown Tuesday if it misses, as expected, a $1.7 billion debt payment to the International Monetary Fund.

Already on its second IMF crisis bailout program, if Athens does not make the payment, it would immediately be cut off from access to Fund services and facilities.

It could also theoretically be placed on track for expulsion from the IMF. But only one country in IMF history has been kicked out: Czechoslovakia, during the Cold War in the 1950s.

That prospect though would likely take time to play out, under IMF procedures, and give Greece and its creditors time to right the situation.

Greece has borrowed about 32 billion euros from the global crisis lender since 2010, some of which has already been repaid. It is committed to repay the IMF 5.4 billion euros this year.

To help fund a budget shortfall and keep current on all its obligations, Athens has been negotiating to get another 7.2 billion euros in bailout funds from the IMF and European Union. About half of that is IMF money.

The talks have broken down, and the Greek government—which was allowed to bundle together several IMF payments due this month into one—is not expected to have enough money on its own for the June 30 payment.

If the Greek government misses the payment Tuesday, it will be declared "in arrears" by the Washington-based institution.

Immediately, Athens would see its access to Fund resources suspended, freezing the IMF portion of the 7.2 billion euros.

Although the Greek government has put the deal offered by creditors to a referendum vote next Sunday, IMF Managing Director Christine Lagarde said earlier this month that "there will be no period of grace" for the country.

Thirty days after a missed payment, Lagarde has to formally inform the IMF executive board, which represents its 188 member countries. Given the visibility of the case, that would probably happen much more quickly, according to a Fund spokesman.

For the moment, credit rating agencies though would not declare Greece officially "in default" on its debt, because the missed payment is to an official lender and not the commercial funding market.

Still, Lagarde would then send a formal complaint to the board, which, three months after the missed payment, would have to consider it. Accepting it could deprive Greece of its right to use SDRs, the IMF currency.

If the situation persists over months, the board would make a declaration of noncooperation, which could lead to a suspension of the borrower's IMF voting and representation rights, further isolating the country within the Fund. 

Within six months of the suspension of voting rights—or up to 24 months after the default—the board would have to begin procedures on expelling the country from the IMF.

But that fate is unlikely. Expulsion would require support of a large majority of the Fund's members, who usually prefer to avoid extreme outcomes. Long in default on their IMF loans, Sudan, Somalia and Zimbabwe have kept their memberships. Czechoslovakia remains the one exception.

Copyright Agence France-Presse, 2015

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