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IMF to lend Greece $1.8 Billion

via Pixabay/KarinKarin via Pixabay/KarinKarin
via Pixabay/KarinKarin via Pixabay/KarinKarin

The International Monetary Fund has resolved to bail Greece out yet again, Bloomberg reports. To be precise, the IMF has approved “in principle” a loan of up to $1.8 billion to Greece.

Just over two years have passed since Greece was unable to make a payment on a previous IMF loan. Greece has endured severe economic conditions since the 2008 financial crisis, but in recent years conditions have been improving.

The phrasing of the IMF’s approval may at first appear noncommittal. But the IMF’s website explains that “approval in principle” is in fact a regular IMF procedure which fell into disuse after the 1980s debt crisis.

Loans which have been approved “in principle” are conditional. They are contingent upon the country in question and its creditors coming to an agreement on debt relief. Thus approval in principle functions as a kind of escrow in the IMF’s debt relief negotiations.

The IMF contends that Greece’s current debt is unsustainable, and that substantial relief will be necessary to reduce the debt to a manageable level. Even if the IMF’s loan is approved, disbursement will not occur immediately. In the meantime, in order to continue with its economic recovery, Greece is in desperate need of debt relief from its creditors.

Frequently the IMF’s strategy is to dangle funding before creditors in order to motivate them to offer more generous terms to debtors. In this instance, IMF is asking that European creditors offer Greece lenience. Creditors might forgive some of Greece’s debt or offer more sustainable repayment terms. Under this compromise, both European creditors and the IMF would bear some of the burden of Greece’s unpayable debt.

Some of Greece’s creditors have proven recalcitrant. Germany, which will face elections in the fall, has refused so far to offer debt relief to Greece. Many German voters are staunchly opposed to offering relief to Greece.

But the IMF, too, is recalcitrant in its claim that significant debt relief will be necessary. Although programs undertaken to reduce Greece’s debt have had some success, reform alone will not be sufficient to pull Greece out of debt, IMF officials say. The IMF predicts that by 2030, despite the enactment of promised economic reforms, Greece’s debt will have risen to 150% of its GDP. At that point the trajectory of Greece’s debt would become explosive.

The IMF hopes that after the German election cycle has closed, it will be able to reach a compromise with Greece’s creditors and turn the loan’s approval in principle into approval in reality.

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