BRUSSELS Greece has said it will default on a 1.6 billion euro debt repayment due to the International Monetary Fund on June 30 unless it receives new funds from its creditors by then, in a move that could set off a chain of events that might eventually pitch Athens out of the euro zone.
A source familiar with the debt talks said the IMF does not provide a grace period, so if it missed the payment Athens would immediately be considered to be in default to the global lender.
That would likely cause turmoil on Greek and euro zone financial markets and might hasten the pace of deposit withdrawals from Greek banks, forcing the government to impose capital controls to stop money fleeing the country.
However, a senior EU official said a non-payment to the IMF would not automatically trigger a default on euro zone government loans to Greece.
The next big question would be how long the European Central Bank was prepared to continue authorizing emergency lending to Greek banks, which is secured partly on the bonds of a defaulting government.
The ECB's policy-making governing council has been conferring weekly since February on the ceiling for emergency liquidity assistance (ELA) from the Greek central bank to commercial lenders, which has been raised incrementally to the current 83.7 billion euros.
The ECB might freeze or lower that ceiling, or increase the so-called "haircut" or discount it applies to collateral presented by Greek banks, both government bonds and private loans, which would presumably be deemed at greater risk.
Greece's next major repayment hump comes in July and August, when it has to redeem bonds held by the ECB for a total value of 6.8 billion euros.
Even if the central bank continued limited funding for Greek banks after a government default on the IMF, the political pressure to pull the plug if Athens defaulted on the ECB would likely be overwhelming, people familiar with the situation say.
There might be calls by some euro zone creditors to suspend payment of funds from the European Union budget to Greece, although there would also likely be pressure from civil society organizations to provide humanitarian aid as the Greek economy reeled from the impact of a default.
Credit ratings agency Standard & Poor's downgraded Greek government debt and that of four Greek banks to CCC junk level last week, reflecting the likelihood of default within 12 months in the absence of a deal between Athens and its creditors.
S&P also said the government appeared to be prioritizing paying pensions and wages over debt service to official lenders.
How much longer the Greek government would be able to go on paying civil servants, pensioners and essential suppliers is not clear. The state budget is close to primary balance before debt service and the government has ordered public authorities to hand over all spare cash to the central bank.
However, tax revenue would be likely to dwindle due to the uncertainty caused by a government default.
Many suppliers say they have not been paid for months, and at some stage, the government might have to pay all or part of its payments in IOUs. This could effectively create a parallel currency if IOUs began to be exchanged for goods or euros at a discount to their face value.
(Writing by Paul Taylor; editing by Ralph Boulton)