Greece, as everyone knows, is running out of money. That means it might not be able to pay its debts, including what it owes the International Monetary Fund, which should be a cause for serious anxiety in Europe.
But there's a dangerous myth starting to gain traction that the nation could default on its obligations but still remain a member of the euro.
The Financial Times said Greece is poised to default on 2.5 billion euros of payments owed to the IMF in May and June if it doesn't get additional bailout cash. The newspaper cited "people briefed on the radical leftist government's thinking." Germany is making contingency plans that would let Greece stay in the euro even if it defaults on its debts.
Greek bond prices are suggesting there's little chance that investors will get repaid in full. It's almost exactly a year since investors lent the country 3 billion euros by buying 4.75 percent bonds repayable in 2019.
If Greece is really considering defaulting on its IMF obligations, its situation is more dire than most observers appreciate. Reneging on the IMF just isn't done by countries that want to stay respectable. Economist Kenneth Rogoff wrote in 2002, "IMF loans have had a stubborn habit of being repaid in full. Although some countries have gone into arrears, almost all have eventually repaid the IMF: The actual realized historical default rate is virtually nil."
Just three countries are currently behind on their IMF payments, according to the fund's latest report. Sudan's arrears total more than $1.4 billion, with Somalia overdue on $322 million and Zimbabwe's unpaid debts worth $110 million. It beggars belief that Greece could join the three African countries in defaulting to the IMF without also getting kicked out of the euro.
It may not be a failed state in the way that Zimbabwe is, but default would underscore the perception that Greece is a failing state. That would destroy any remaining trust in the Greek government, with Germany likely to run out of patience. Even though there's no legal mechanism in place to revoke euro membership, it would quickly become obvious to everyone that being in the common currency and being effectively bankrupt are incompatible.
German Finance Minister Wolfgang Schaeuble said last week that the current Greek government has "destroyed" any progress that the previous administration made on resolving its economic problems, and that there's no chance of an agreement this month. So if April 24 really is the deadline, and Greece's euro partners see no chance of reaching a deal by then, the endgame for the Greek drama is less than a week away--and there seems little prospect of a happy ending.
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Mark Gilbert is a Bloomberg News columnist.
Editorial on 04/20/2015