IMF Considers Dropping Exemption That Enabled 2010 Greek Loan

The International Monetary Fund is considering creating a new way for indebted countries to get large loans and dropping a exception to its lending rules that enabled Greece to obtain a loan in 2010 without having to first restructure its debt.

The exemption was established at the start of the European debt crisis to prevent contagion by allowing some nations to receive financing even though the fund could not say with “high probability” that their debt was sustainable. In a report released today, IMF staff proposed that a country’s creditors instead be asked for a “a relatively short extension of maturities” in exchange for IMF support.

“It has become clear that the systemic exemption established in 2010 does not provide a coherent long-term solution to the problem,” staff wrote. The proposed changes would “help the member improve its capacity to service its debt without necessarily requiring significant debt reduction.”

The Washington-based IMF has been trying to draw lessons from its bailouts in the euro region and in particular in Greece, which in 2012 ending up pushing through the largest sovereign restructuring in history.

Today’s report, which will be followed by more studies before the board of directors settles on new rules, is described as an attempt “to reduce the costs of crisis resolution for both creditors and debtors.”

Debt Sustainability

The proposed changes aim to give flexibility to 2002 rules applying to countries seeking financing above normal limits. Until the 2010 exemption, the fund could either consider that their debt was sustainable with “high probability” and agree to a loan, or in effect force a debt restructuring for the others.

“Where there is uncertainty regarding debt sustainability, requiring debt restructuring that is sufficiently deep to restore sustainability with a high probability imposes costs that, in the end, may not be justified,” staff wrote.

At the same time, the exception created in 2010 only benefits countries that are large or interconnected, according to the report.

“In the event that a debt restructuring is required, this approach simply aggravates the problems for the member and also places the fund’s own resources at greater risk,” IMF economy and legal experts wrote.

The proposed changes would apply to a member country that has lost market access and has public debt that is considered sustainable, but not with high probability. Creditors would be asked for a “reprofiling” that “would typically not involve a reduction in either principal or coupon,” staff wrote.

In case of contagion concerns, IMF staff recommended lending by other creditors such as development banks or a common backstop, such as the one that was created in Europe during the debt turmoil. In some circumstances, it may be best to delay a decision on debt restructuring, it said.

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