No funds released
WASHINGTON: The International Monetary Fund late Thursday approved a one-year, $1.8 billion loan program for Greece but will not release any funds until the eurozone agrees on a debt relief plan, in a highly unusual compromise step.
The approval in principle means the loan “will become effective only after the Fund receives specific and credible assurances from Greece’s European partners to ensure debt sustainability, and provided that Greece’s economic program remains on track,” the IMF said in a statement
IMF Managing Director Christine Lagarde said Greece and Europe will need to agree on a debt plan “soon.”
“As we have said many times, even with full program implementation, Greece will not be able to restore debt sustainability and needs further debt relief from its European partners,” Lagarde said.
The new IMF loan “is contingent on this agreement on debt relief.”
But unlike many previous instances when this format has been used, the fund did not set a deadline for fulfilling the missing criteria, in this case a debt relief plan.
Delia Velculescu, IMF mission chief for Greece, told reporters the sides “agreed today not to set a deadline to avoid setting expectations” that, if unfulfilled, could create “deep market disruptions.”
But she said there has been “good progress” made in the talks between Athens and Brussels.
Once a debt plan is in place for Greece, the IMF board will have to once again give its approval in order to release any funds.
The precautionary standby loan will expire on August 31, 2018, shortly after the expiration of the European Stability Mechanism program.
Lagarde said the loan “provides both breathing space to mobilize support for the deeper structural reforms that Greece needs to prosper within the euro area, and a framework for Greece’s European partners to deliver further debt relief to restore Greece’s debt sustainability.”
The IMF last month announced it would revive the seldom-used option of approving a loan “in principle,” in order to convince eurozone finance ministers to release desperately needed new funds to Greece.
Germany had refused to consider more debt relief unless the IMF participated in a loan program, creating an impasse that endured many months.
The unusual move to approve a loan with no immediate funds was a compromise response, but fund officials insist it is not bending the rules.
The tactic has been used in 19 cases previously — all in the 1980s — for countries like Argentina, Brazil, Mexico and Yugoslavia.
The latest 8.5 billion euro disbursement from the eurozone loan program to crisis-stricken Greece was approved last week, just in time for Athens to avert a default on a seven-billion euro debt payment.
Lagarde also alluded to another dispute with Europe over the country’s finances, and the best use for any excess cash.
She acknowledged that the new economic reforms — which broaden the tax base and reform the pension system — can help the country achieve an “ambitious” primary budget surplus of 3.5 percent of gross domestic product (GDP) in the medium term, from 2019 to 2022, a target eurozone officials have insisted on.
However, after 2022, “this target should be reduced to a more sustainable level of 1.5 percent of GDP as soon as possible, to create fiscal space for better targeting social assistance, stimulating public investment, and lowering tax rates to support growth,” she said.
Using the funds for program to protect vulnerable groups “is key to preserving the sustainability and fairness of Greece’s adjustment effort.”
The loan program also sets a ceiling on central government debt of 325 billion euros.
IMF staff project the Greek economy will grow by 2.1 percent this year, after no growth at all in 2016, rising to 2.6 percent in 2018.