By Ambrose Evans-Pritchard at The Telegraph
Greece is to take the drastic step of skipping a €300m payment to the International Monetary Fund on Friday, invoking an obscure mechanism in abeyance since the 1970s to bundle all debts due in June and pay them at the end of the month.
It is the first time that a developed country has ever missed a payment to the IMF since the creation of the Bretton Woods institutions at the end of the Second World War.
The news broke after the Athens stock exchange had closed but a bloodbath is feared when the bourse opens on Friday. Yields on two-year Greek bonds spiked 63 basis points to 21.8pc amid mounting fears of a deposit run on Greek banks and the imposition of capital controls as soon as this weekend.
The IMF said it had been notified by the Greek authorities that they would pay the entire €1.6bn due this month on June 30, dusting down a procedure last used by Zambia in the 1980s.
The shock move came as leaders of the ruling Syriza movement were locked in a series of emergency meetings to vent their fury over the latest austerity demands by the European creditor powers.
Senior figures in the party lined up to denounce the “ultimatum” from Brussels as another wasted moment after four months of acrimonious talks. “It cannot form the basis of an agreement,” said Tassos Koronakis, the party secretary.
Alexis Mitropoulos, the deputy speaker of parliament, called it “the most vulgar and murderous plan” that shattered hopes of a deal just as everybody was expecting a breakthrough. Others daubed their war paint and vowed angrily that there would be no “surrender”.
The skipped payment is the clearest sign to date that the crisis is escalating to a dangerous level as Syriza refuses to buckle. It will not be resolved without European statesmanship of a high order, so far lacking. While the authorities sought to play down the Greek decision, it was clearly intended as a warning shot. Syriza had the money at hand. It chose not to pay as a conscious political choice.
The Greeks accuse the IMF of violating its own rules by colluding in an EMU-led policy that leaves the country with unsustainable debts. Athens is implicity threatening to escalate the situation all the way to a full default to the IMF, setting off a grave institutional and political crisis within the Fund itself.
Syriza leaders say they are unwilling to burn any more of the country’s dwindling cash reserves to pay creditors until there is a credible offer on the table, insisting that their priority is to pay pensions and salaries and avoid default to their own people.
One cabinet minister told The Telegraph that the proposals by creditors seemed designed to bring about a deliberate rupture. “They want to force us into a position where we can’t sign,” he said.
“In a strange way we are all breathing a sigh of relief. We were afraid of a bad deal that would split the party but this is so atrocious it makes life easier. None of us can accept it,” he said.
The decision to bundle the payments to the IMF brings forward a decision that was coming anyway. EU sources say the Greeks cannot meet a fresh deadline for €750m next week.
Christine Lagarde, the IMF’s managing director, was caught off guard by the move. Hours earlier she had expressed confidence that the Greeks would meet Friday’s deadline.
Greece is still a long way from formal default. If the country misses the payment on June 30 – a certainty unless one side or the other blinks – this will then set the clock ticking on a six-week process.
Yet events risk spinning out of control much sooner if there is a collapse of confidence. Analysts warn that deposit flight was already running at €400m a day earlier this week and may now set off a fast-moving chain of events, leading to the sort of deposit lockdown seen in Argentina during the peso crisis in 2001, followed by a parallel currency or IOUs, and a temporary nationalisation of the banking system - if the European Central Bank cuts off the liquidity lifeline.
Alexis Tsipras, the Greek prime minister, had hinted that Greece would cover Friday’s payment to the IMF after meeting top EU officials for five hours in Brussels on Wednesday night, saying “don't worry about it”.
But events are taking on a life of their own in Athens as the party imposes its will, and Mr Tspiras himself has oscillated from emollience to defiance almost by the hour.
While promising that a deal with creditors was “within sight”, he then undercut this completely by insisting that the only “realistic proposals on the table” are the alternative measures put forward by the Greek government earlier this week in a 46-page document.
Syriza officials say his half-hearted efforts to talk up hopes of a deal in Brussels belie the real mood at the Maximus Mansion, where the prime minister is increasingly ready to contemplate rupture, as he hinted in a fiery editorial in Le Monde on Sunday.
The creditors have offered some leeway on austerity, lowering their demand for a primary surplus to 1pc of GDP this year, 2pc next year and 3pc in 2017, but even this now implies a major fiscal squeeze as the economy contracts again.
The demands include pension cuts and VAT raises that together amount to 1pc of GDP this year and 2pc in 2016, a fiscal shock that risks pushing Greece back into a seventh year of depression. “They want us to raise the tax on hotels to 23pc in the middle of the tourist season. These people are mad,” said one Syriza official.
Ashoka Mody, a former IMF bail-out chief in Europe, said the Greeks are right to resist the demands. “Everything that we have learned over the past five years is that it is stunningly bad economics to enforce austerity on a country in a deflationary cycle. Trauma patients have to heal their wounds before they can train for the 10K,” he said.
“I am frankly shocked that we are having any discussion about raising VAT in these circumstances. We have just seen a premature rise in VAT knock the wind out of a country as strong as Japan,” he said.
“Syriza should recruit the IMF’s research department to be their spokesman because they are saying almost exactly the same thing. The entire strategy of the creditors is wrong and the longer this goes on, the more it's going to cost them, as well as Greece."
Yet the IMF itself seems to have a split personality. Its officials on the ground in Greece have been taking the toughest line against Syriza, though they do support Greek demands for debt-relief.
EU sources say the Fund wishes to extricate itself as soon as possible and appears willing to precipitate a breakdown in order to force Greece and the EU creditors to find a modus vivendi.
Asian and Latin American members of the IMF board have long resented what they regard as misuse of the IMF’s resources to sort out an internal family dispute within a rich currency bloc, an anomaly that ropes some of the world’s poorest countries into bailing out Europe.
They insist that the EMU creditor powers have ample means to resolve the crisis at any time they choose but are dragging their feet because they have yet to face up to the implications of their own monetary union.