Athens - The International Monetary Fund (IMF) agreed to a new conditional bailout for Greece, ending two years of speculation on whether it would join in another rescue and giving the seal of approval demanded by many of the country’s eurozone creditors.
The Washington-based fund said on Thursday its executive board approved “in principle” a new loan worth as much as $1.8bn. The disbursement of funds is contingent on eurozone countries providing debt relief to Greece.
“As we have said many times, even with full programme implementation, Greece will not be able to restore debt sustainability and needs further debt relief from its European partners,” IMF Managing Director Christine Lagarde said in a statement.
“A debt strategy anchored in more realistic assumptions needs to be agreed. I expect a plan to restore debt sustainability to be agreed soon between Greece and its European partners.”
IMF officials estimate that, even if Greece carries out promised reforms, the nation’s debt will reach about 150% of gross domestic product by 2030, and become “explosive” beyond that point.
European creditors could bring the debt under control by extending grace periods, lengthening the maturity of the debt or deferring interest payments, the IMF said in a report accompanying the announcement.
Greek banks will need to undertake another asset quality review and stress test to ensure they are adequately capitalised before the end of the programme, Lagarde said.
In its debt analysis assumptions, the IMF set aside a buffer of about €10bn to cover potential support for banks, which have undergone successive capital increases over the course of Greece’s debt crisis, most recently in 2015. “This amount may not be sufficient,” according to the fund.
The IMF’s decision to agree on the “precautionary stand-by arrangement” reflects the compromise reached in June between euro-area finance ministers reluctant to offer more generous repayment terms to Greece, and the fund, which resisted financing a country whose debt it considers too high to be paid back in full.
“The shared conditionality between the IMF and ESM programs ensures full alignment on the policy package for Greece,” the European Stability Mechanism’s managing director Klaus Regling said in a statement on Friday.
“This should allow Greece to successfully complete the reforms foreseen until the end of the ESM and IMF programs in August 2018, to rebuild a competitive economy and to regain market confidence.”
Return to markets
A much-anticipated Greek return to bond markets this week has been held off partly due to a €325bn ceiling set by the IMF on the amount of debt the country can hold.
Using possible workarounds like debt swaps - that could improve Greece’s maturity profile without increasing the overall load - the government is waiting on how markets react to the IMF’s debt sustainability analysis before a possible foray as soon as next week.
The government is closely monitoring conditions in bond markets, and will only return when the time is right, Greek government spokesman Dimitris Tzanakopoulos told reporters in Athens on Thursday.
The yield on Greek 10-year bonds was little changed at 09:51, rising one basis point to 5.27%. The Athens Stock Exchange index fell 0.4%.
Having the IMF co-finance Greece’s rescue programme was a key demand of many of the country’s eurozone creditors, led by Germany, who see the fund’s participation as ensuring the credibility of the reforms the country is asked to implement.
But upcoming elections in Germany also made it impossible for Berlin to concede to any further debt relief for Greece, pushing instead for all decisions to be taken at the end of the country’s bailout in the summer of 2018 - and only if needed.
While the fund’s decision helps both the IMF and Germany stick to their guns, it does mean the issue will likely arise after the German elections in the fall, when the question of whether Greece will actually receive any loans from the IMF resurfaces.
“Despite no prospect of an immediate disbursement, the IMF’s participation is useful for everyone,” Tassos Anastasatos, an economist at Eurobank Ergasias, said before Thursday’s announcement. While for eurozone governments it’s a “disciplining device” on Greece, in the long-term it gives Athens leverage to demand something more on debt relief, he said.
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