This Is What Default Looks Like

In a previous post, I predicted "if and when Greece defaults, it will begin with an IMF obligation."

This is exactly what's happening.

Greece has chosen to go down what is arguably the least disruptive path to default: It has invoked the IMF bundling rule, which means it can defer its June payments to the end of the month. After that, it can be in arrears for 30 more days before IMF can label the Greeks "in default." Between now and July 31, Greece can be in arrears without actually being "in default." It can be in default without being in default.

Technically, ECB can declare Greece to be in formal default if it fails to repay IMF on June 30 (and EFSF can trigger an escalation procedure), but in reality there is no "up side" for ECB (or EFSF) to hasten a doomsday scenario by pulling the rug from Greece prematurely. The political cost (for Merkel et al.) of appearing to call "default" too quickly would be steep.

The best-case scenario is that Greece's choice to enter into an IMF arrears procedure turns out to be mere drama, and everyone muddles through.

The worst-case scenario is that this is, in fact, what default looks like: First, a lengthy IMF arrears procedure (during which time, the world's markets have an opportunity to adjust to the new reality). Then hair cuts for everybody.

It will probably look, for a while, like everyone is muddling through, with Greece making new promises it cannot keep, more scolding from the creditors, etc. But if June 30 passes with Greece still in arrears, it means the default is underway.

Things have long since passed the treacherous point where the Syriza government ends up having to lie to someone: either the Greek people, or the creditors. Therefore, there is no way the current government can survive until August. There will be new elections somewhere along the way.

But look at the bright side. If Greece somehow manages to get through July without defaulting, it just has a few more payments to go:

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