Key Questions on Approval in Principle and Greece

Last Updated: July 20, 2017

On July 20, 2017, the IMF Executive Board approved in principle (AIP) a new IMF Stand-By Arrangement (SBA) for Greece. Financing under the arrangement is conditional on receiving specific and credible assurances on debt relief from Greece’s European partners to restore debt sustainability and continued implementation of the program. It is set to expire on August 31, 2018, shortly after the expiration of the European Stability Mechanism (ESM) program.

If fully implemented, the Greek authorities’ program, supported by the SBA, will help restore medium-term macroeconomic stability and facilitate market access, while providing breathing space to mobilize support for the deeper structural reforms that Greece needs to prosper within the euro area.

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Question 1: How will a new IMF-supported program help Greece?

A new program can help Greece restore macroeconomic stability and regain market access. In particular, the recently legislated fiscal reforms dealing with the pension system and income tax bases can help to support primary surplus targets in the medium term and allow for a rebalancing of the budget toward more growth-friendly fiscal policy over the long term. These reforms will reduce both exceptionally generous tax exemptions for the middle classes and unaffordably high-pension spending.

Greece now needs to continue the reform momentum, even after the conclusion of the program, to support long-term growth. Moreover, Greece needs further debt relief from its European partners to restore debt sustainability. There has been progress in narrowing differences in the discussions on debt sustainability with European partners, and the IMF believes that there are good prospects for bringing these negotiations to a successful conclusion.

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Question 2: What is Approval in Principle? Why was it created?

Approval in Principle (AIP) is a procedure that allows the IMF’s Executive Board to approve an IMF financing arrangement for a member country based on agreement reached with the country on economic policies, but conditional on agreement being reached between the country and its creditors on debt relief or new financing. AIP allows additional time for such an agreement to be reached.

Once this agreement is reached, the IMF’s Executive Board would need to take a second decision to make the arrangement effective, at which point financial resources become available to the country.

During the 1980s, the IMF used AIP on many occasions to catalyze agreement between IMF members and their creditors.

It was used in cases where there was agreement on the policies that would underlie an IMF arrangement, but where full agreement had not yet been reached between the country and its creditors on financing or debt relief.

Without agreement on financing or debt relief, the IMF could not approve an arrangement that made resources available, as the IMF cannot lend in situations lacking adequate assurances on debt sustainability or program financing. This created a potential stand-off: the creditors held back, awaiting approval of the IMF arrangement, but the IMF could not approve the arrangement without sufficient commitments from the creditors.

AIP addressed this problem by allowing the IMF to formally endorse the member’s policy program while making clear that the release of IMF resources would be contingent on agreement between the country and its creditors on debt relief or new financing.

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Question 3: How does AIP help Greece?

The use of AIP allows the IMF to support the progress that Greece has made on policies, even while release of IMF resources would be conditional upon Greece’s European creditors providing commitments for debt relief sufficient to secure Greece’s debt sustainability, and subject to Greece’s continued implementation of the IMF-supported program.

Use of the AIP procedure gave confidence to creditors to disburse to Greece under the ESM program in July—thus reducing a potentially serious stress on the Greek economy and the overall financial system. It also gives confidence to investors on the prospects for the Greek economy to grow and for its people to prosper.

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Question 4: How can Greece’s debt become sustainable again?

As indicated in the Debt Sustainability Analysis recently published, the IMF’s assessment that Greece’s debt is unsustainable is based on the expectation that market financing will eventually need to replace the highly subsidized official financing currently in place. Given the high level of debt, the cost of market financing is likely to lead to an explosive debt trajectory over time. Discussions with Greece’s European partners on modalities to achieve sustainability are ongoing.

The IMF believes—and has expressed so frequently—that Greece’s debt can become sustainable if creditors extend maturities and grace periods beyond what is presently being proposed. Creditors should take advantage of the current environment of low interest rates to “lock in” the financial cost of Greece’s debt for many years to come, so that the country does not depend on market financing on a substantial scale.

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Question 5: Does an arrangement “Approved in Principle” still have conditionality, reviews and a Debt Sustainability Analysis (DSA)?

An arrangement that is approved in principle has the same standard elements and requirements as any IMF arrangement, and it is expected that authorities will start implementation right away. The sole difference is that no resources become available until there are satisfactory assurances received from creditors on financing or debt relief.

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Question 6: Does AIP come with a deadline?

It depends on the country and the circumstances. When the AIP procedure was used in the 1980s, there was often a 30-day deadline for the arrangement to become effective. However, there were also a number of cases in which there was no deadline, the deadline was longer than 30 days, or the initial deadline was extended.

In the case of the AIP for Greece, the Executive Board decided not to set a specific deadline after which the AIP would lapse, so as to avoid setting expectations that, if unfulfilled, could lead to market disruptions.

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Question 7: Isn't the IMF backing away from its emphasis on debt relief?

For countries with debt sustainability issues, the IMF’s emphasis on debt relief is maintained whether a financial arrangement is approved outright or approved in principle. In either case, the release of IMF resources is conditional on debt relief commitments being in place – in other words on debt being sustainable.

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Question 8: Are there any IMF guidelines governing AIP?

The AIP procedure was initially used in several cases without guidelines. The IMF’s Executive Board subsequently adopted guidelines in 1984 that set out general principles for the use of AIP. These guidelines are no longer applicable, however, as they were designed to address the specific context of the 1980’s debt crisis, which differed from current circumstances in a number of important respects.

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Question 9: Approval in Principle has not been used in a long time, why is the IMF putting it back on the table now?

The IMF has used AIP in the past in cases where there was agreement on the policies that would underlie an IMF arrangement, but where full agreement had not yet been reached between the country and its creditors on financing or debt relief. It was used a total of 19 times during the 1980’s debt crisis to help catalyze financing or debt relief in the context of IMF-supported programs for the following countries: Sudan, Ecuador, Zaire, Madagascar, Jamaica, Zambia, Côte d’Ivoire, Kenya, Somalia, Chile, Republic of Congo, Mexico, Nigeria, Argentina, Yugoslavia, and Brazil (for Sudan, Zaire and Cote D’Ivoire, the AIP procedure was used twice each).

Over time, AIP fell into disuse as it was no longer needed. This reflected in large part a new willingness by Paris Club official creditors to signal debt relief commitments in advance of a IMF arrangement. In addition, for private creditors, AIP was also no longer needed once the IMF became able to “lend into arrears.”

While the procedure has not been used recently, it can be used for cases like the one here, where there is agreement on the policies that would underlie an IMF arrangement, but where full agreement has not yet been reached between the country and its creditors on financing or debt relief, and the IMF’s role can be helpful in catalyzing financing and debt relief from creditors.