On the Brink: Greece Empties Its Emergency IMF Account—to Repay the IMF!

“How did you go bankrupt?” Bill asked.

         “Two ways,” Mike said. “Gradually and then suddenly.”

—Ernest Hemingway, The Sun Also Rises

The Daily Telegraph reports that on May 12 “Greece avoided an unprecedented default to the International Monetary Fund [IMF] after raiding its emergency cash account at the Fund, in a major sign the country is edging ever closer to stiffing its senior creditor.”

According to Reuters,

Greece, like all other International Monetary Fund members, holds reserves from the IMF that are denominated in Special Drawing Rights (SDR), a basket of international currencies. The reserves must be kept at a certain level or the country must pay interest if its holdings fall below its “allocation” of SDRs from the IMF.

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But Greece wouldn’t even have those SDRs available to it were it not for an action taken by the IMF in the aftermath of the financial crisis in 2009. According to The Wall Street Journal,

While Athens has been accumulating its [Special Drawing Rights—SDR] holdings for decades, the lion’s share of its SDR reserve came from a 2009 operation in which the IMF effectively printed money and disbursed some to all its members. Greece’s SDR holdings rose from 15.4 million at the end of 2008 to 694 million at the end of 2009, after the allocation.

Lurking in the background of this latest crisis is Russian President Vladimir Putin. Ambrose Evans-Pritchard reports that Putin “has offered Greece roughly €2bn up-front to smooth the way for the so-called ‘Turkish Stream’ gas pipeline” in exchange for “a Greek veto on an extension of Western sanctions against Russia.”

In a 21st-century echo of the famous quotation above from Hemingway, Evans-Pritchard reports that

German finance minister Wolfgang Schauble said over the weekend that Greece risked spinning into default unless there was a breakthrough soon. “Such processes also have irrational elements. Experiences elsewhere in the world have shown that a country can suddenly slide into insolvency,” he told the Frankfurter Allgemeine.

With Greece’s IMF reserves dwindling to well below the level needed to stave off another default, the tragicomedy playing out on the fringes of the eurozone provides a vivid example of the moral hazard that can occur when countries have access to a lender of last resort.