No actual default by Greece - yet

From both technical and practical perspectives Greece has not defaulted. There will only be a default when lenders to Greece call a default.

The lenders haven't done so and neither have the rating agencies. By implication, if all concerned are prepared to avoid a declaration of default, the metaphorical can is there to be kicked down the road for some time yet.

The whole sorry Greek saga that has created turmoil in financial markets over the past few weeks may not end anytime soon. Missing the €1.5 billion payment that was due to the IMF on June 30 has not proved to be the climactic event that many thought it would be.

The IMF has not declared an event of default: it is merely treating the missed payment as just that. Officially, Greece is now in arrears with the IMF.

The IMF does not declare events of default. It has a documented set of procedures that must be followed when a country falls into arrears. These procedures can be found on pages 912-3 of the "Selected Decisions And Selected Documents Of The International Monetary Fund, December 2013".

These procedures must be followed and can take up to two years to work through.

And what happens at the end of two years if the recalcitrant borrower has not made good? Their membership of the IMF is cancelled.

Sudan has a debt to the IMF that has been outstanding since 1984. Somalia has been in arrears since 1987 and Zimbabwe, the most recent to enter into arrears, has been this way since 2001.

By missing its payment to the IMF, Greece has defaulted on the €131 billion owed under the European Financial Stability Facility that was extended in December 2012. As a result, the arrangement expired on June 30 and has not been renewed, but the European Commission is not seeking repayment of the money owed and has signalled that it will not do so.

So everything continues as it was.

Even the three major credit rating agencies have not said Greece has defaulted. Missing a payment to an official creditor is not an event of default.

For an event of default to be called by the rating agencies a payment to commercial lenders must be missed, or moves taken to restructure such a debt. This hasn't happened yet.
 
And even if it does, what are the commercial lenders going to do: sue Greece for payment?

Greece has approximately €39 billion of debt owed to commercial lenders. The most pressing payment falling due is the redemption of €2.0 billion of Treasury bills on July 10.

Greece also has a €83 million loan denominated in Japanese yen, due on July 14 and €71 million of bond coupons to be paid on July 17. These are relatively small amounts and may not result in a default to commercial lenders.

For the time being Fitch Ratings has lowered its ratings on Greece to 'CC', Moody's Investor Service lowered its ratings to 'Caa3', and Standard & Poor's has dropped its ratings to 'CCC-'.

Fitch and S&P, however, lowered their ratings on Greek banks to default levels. This is in response to the enforced bank holidays and imposition of limits on withdrawals.

And this brings us to where Greece is vulnerable and the events that could bring the impasse to a conclusion, of sorts.

If the referendum on Sunday results in a no vote, it will be a vote to leave the Eurozone. The cap that the ECB has placed on the emergency liquidity assistance that it has been providing to Greek banks will remain in place.

No more money will be provided. An extension of the bank holiday that is scheduled to end on July 7 is likely, along with a tightening of withdrawal limits and exchange controls.

The drachma will have to be re-introduced ASAP, or the country will collapse.

If the referendum results in a yes vote, the government will collapse. The ECB will probably resume its support for the Greek banks but it will be quite some time before meaningful discussions with Greece's creditors can resume.

And when the discussions resume there will have to be some pragmatism on both sides. With debt running at 177 per cent of GDP and owed to external creditors, Greece's position is unsustainable.

Generations of economic growth or austerity are unlikely to change this in any meaningful way. Restructuring is the only answer or we can expect more Greek 'crises' in the years to come.