IMF Survey: IMF Approves €30 Bln Loan for Greece on Fast Track

IMF News, May 9, 2010

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IMF Executive Board approved on May 9, 2010 a €30 billion three-year loan for Greece.
The loan is part of a joint European Union-IMF €110 billion financing package to help Greece ride out the debt crisis, revive growth, and modernize the economy.
The program was approved under front-loaded, fast-track procedures with enabling parliamentary measures approved up-front.

Combined immediate financial support from the Fund and EU: €20.0 billion available immediately.
Of that immediate support, the program makes about €5.5 billion immediately available to Greece from the Fund as part of joint financing with the European Union.
In 2010, total IMF financing will amount to about €10 billion and will be partnered with about €30.0 billion committed by the EU.
The joint financing is intended to mean Greece will not have to tap international financial markets until 2012.

The Stand-By Arrangement is part of the joint €110 billion package (about $145 billion) over three years.
The arrangement entails exceptional access to IMF resources, amounting to more than 3,200 percent of Greece’s quota, and was approved under the Fund's Emergency Financing Mechanism procedures.

Greece faces a dual challenge: a severe fiscal problem (deficits and public debt that are too high) and a competitiveness problem.
Fiscal consolidation imperatives:
- Wages and social benefits constitute 75 percent of total government expenditure, implying reductions in public wage and pension bills.
- The government must reduce the fiscal deficit and place the debt-to-GDP ratio on a downward trajectory.
Competitiveness and structural reform imperatives:
- Implement pro-growth policies and reforms to modernize the economy and open opportunities.
- Reduce inflation below the euro area average, including by keeping wages and labor costs flat to regain price competitiveness.

Debt restructuring was argued to create more problems than it could solve; default could make things worse.
Key points made against restructuring:
- Restructuring would not help Greece’s capacity to grow; fiscal and structural reforms in the Government’s program are designed to bring down costs, make the labor market more flexible, and improve the business and investment climate.
- The complexity of economic and political inter-linkages, including wide holdings of Greek bonds by private investors and public entities, complicates alternatives and raises contagion risks.
- Most adjustment is needed to eliminate Greece’s large primary deficit (the deficit net of interest payments); this is the main issue, not the level of debt.
The government will pursue prudent debt management and update tools to ensure adequate risk management.

Conditionality is characterized as well targeted and focused on correcting Greece's key imbalances: high debt and lack of competitiveness.
The IMF emphasized strong ownership and leadership by the Greek authorities; it is their program.
The program includes measures to protect the most vulnerable, a critical component for effective implementation.

The program aims to safeguard financial sector stability.
As the banking system undergoes a period of deflation expected to impact profitability and bank balance sheets, a Financial Stability Fund (FSF) will be established to expand the safety net for dealing with solvency pressures.

Real GDP growth is expected to contract sharply in 2010–2011, and recover thereafter.
Unemployment is expected to peak at nearly 15 percent of GDP by 2012.
The frontloaded fiscal adjustment in 2010-11 will suppress domestic demand in the short run.
From 2012 onward, improved market confidence, a return to credit markets, and comprehensive structural reforms are expected to lead to a rebound in growth.
Inflation is expected to remain below the euro average; price adjustment is expected to come from domestic demand tightening, fiscal adjustment, moderation of public wages and pensions, and moderation of private sector wages due to demonstration effects.

Source: IMF Survey online, May 9, 2010 — IMF Approves €30 Billion Three-Year Loan for Greece as part of a €110 Billion Joint EU-IMF Package.