IMF Approves Conditional $1.8 Billion Greece Loan

The International Monetary Fund 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 Thursday its executive board approved “in principle” a new loan worth as much as $1.8 billion. The disbursement of funds is contingent on eurozone countries providing debt relief to Greece, Bloomberg reported.

“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,” 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 capitalized before the end of the program, Lagarde said.

In its debt analysis assumptions, the IMF set aside a buffer of about €10 billion ($11.6 billion) 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 eurozone 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.”

A much-anticipated Greek return to bond markets this week has been held off partly due to a €325 billion 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.