2nd UPDATE: IMF Approves EUR28 Billion Loan For Greece
March 15 2012 - 2:13PM
Dow Jones News
The International Monetary Fund's executive board Thursday
approved a EUR28 billion ($36.49 billion) loan for debt-beleaguered
Greece despite fears by some members that political risks may
derail the program.
The decision allows for an immediate disbursal of the first
EUR1.65 billion tranche of the loan, though practically the payout
may not be transferred to Athens until Monday.
As a small share of a joint program with the European Union, the
loan helps Athens stave off default and the euro zone to
temporarily prevent the debt contagion from spreading to other
ailing countries in the region.
"We want to help prevent the contagion scenario," a person with
direct knowledge of the board's deliberations said after the
meeting.
Euro-zone countries Wednesday signed off on its lion-share
portion of the joint EUR130 billion bailout package for Greece.
Still, several board members have expressed reservations about
the ability of Greece to successfully carry out the four-year
program. Brazil's representative to the IMF, Paulo Nogueira
Batista, abstained from the decision, a diplomatic way of opposing
the program, according to people familiar with the matter.
Technically, there is no vote as the board decides based on
consensus reached before the actual meeting. But the positions of
each delegation are recorded in confidential minutes.
"There's very little room for slippage here -- it's a very tight
timeline," a board member told Dow Jones Newswires after the
meeting.
The IMF has repeatedly said the Greek program runs a very high
risk of derailment given the depth of economic restructuring
required for the joint IMF-European Union package. The IMF is
especially wary given Greece's track record of failing to meet many
of its fundamental program targets.
IMF staff reported to the board some small but encouraging signs
that the program could be more politically feasible than originally
thought, citing polls that show a strong majority of Greeks want to
stay in the euro zone and data indicating Greeks hold a significant
amount of non-Greek assets outside the country that could be used
to help spur the economy back to health.
Fund staff have warned that a failure of Athens to implement
needed economic changes would push financing costs up to EUR245
billion. That's compared to combined debt-restructuring costs and
official-sector lending under the new program of around EUR230
billion.
According to the person with direct knowledge of the board's
deliberations Thursday, the board is split over whether the fund
should provide anymore cash to cover any possible future financing
gaps.
"Many board members are not prepared to give anymore money," the
person said.
Europeans sitting on the board want the fund to leave open the
possibility, but many others don't think the IMF should increase
its exposure to Greece, given both the amounts the IMF has lent to
Athens and the risk of default.
"The debt trajectory is extremely sensitive to program delays,
suggesting that the program could be accident prone, and calling
into question sustainability," IMF staff wrote in a recent report
to the IMF board. IMF staff assume in that report that additional
financing requirements would be covered under the terms of the
European Financial Stability Fund, the euro zone's bailout
facility.
"It may take much more time than assumed to identify and
implement the necessary structural reforms to improve the primary
balance," IMF staff warned in the report. "And concerning asset
sales, delays may arise due to market-related constraints,
encumbrances on assets or political hurdles," they said.
The fund is attempting to counter what many board members fear
is over-exposure to Greece. Compared to its European partners'
contributions, the IMF's EUR28 billion loan is proportionally
smaller than the bailout package it succeeds. The IMF and Europe
abandoned the first program after it failed to stem the crisis,
replacing it with tougher economic conditions, a restructuring of
EUR206 billion in privately held Greek government bonds and more
bailout cash. The fund had already issued more than EUR20 billion
in credit to Greece under the previous program, but cancelled the
remaining EUR10 billion in disbursements in favor of the new
package.
Also, the IMF is extending its payout period by a year, making
it a four-year program instead of three. The longer payment
schedule allows for smaller disbursements and preserves more IMF
capital should the IMF halt payments for program failure.
Some economists still predict Greece ultimately may have to pull
out of the euro zone or, at the very least, restructure its debt
again. Many have said Greece already is at the limits of its
ability to enforce already-approved policies.
Several of the most powerful politicians in the Greek government
have given the IMF written political commitments to carry out the
economic reforms. Some, however, expect that commitment to the
program may wane after elections planned in the coming weeks.
Some analysts say the fund is using the loan program for Greece
to buy time for other ailing euro-zone countries to put their
economies back on a healthy path and for banks to insulate
themselves against a worsening of the debt crisis. The fund is
urging euro-zone leaders to boost the size of its general bailout
fund by at least half and to use some of that cash to bulk up
banks' capital defenses.
-By Ian Talley, Dow Jones Newswires; 202-862-9285;
ian.talley@dowjones.com
--Costas Paris in London, Matina Stevis in Brussels, and Sudeep
Reddy of the Wall Street Journal in Washington, D.C., contributed
to this article.