The International Monetary Fund has pushed ahead in its rescue program for Greece despite a $12 billion hole in the country’s finances, a concession that could put the fund’s own finances at risk.
The IMF board on Wednesday approved a $4 billion loan payment to Greece, even as it acknowledged that the program was out of balance.
It is “difficult to categorically affirm” that the country can support its debts, IMF staff said in a detailed report on the country released Friday. This week’s payment was the first since March, after months of political stalemate in Greece.
The staff report portrayed a nation gradually righting its finances but facing years of economic uncertainty. If the latest program goes off track and other European nations renege on promises of further financial support, the fund report said, “the country would likely not have the capacity to repay the fund. ... The fund’s capacity to absorb any losses would be limited.” Greece currently owes the IMF around $25 billion.
But the IMF board felt it should press ahead, given the risks to the broader economy. Though the consequences of Greece leaving the euro zone have diminished over the last three years, the fund estimated that a Greek euro exit would still cause a sharp drop in euro-zone economic growth of 1.5 to 6 percentage points.
With the stakes so high, the fund approved the latest loan payment even though the staff report estimates that Greece will need as much as $12 billion in additional outside help in 2015 and 2016 to stay afloat.
Under its internal rules, the IMF can continue lending as long as a country’s rescue program is fully funded for the coming year, so the need for more money in future years is not a technical barrier.
But the situation in Greece shows the lengths the fund has gone to in trying to keep the euro zone intact. Typical IMF lending programs last three years and outline how the government will pay its bills throughout that period. That usually includes a gradual restoration of a country’s ability to borrow on its own. The IMF’s program for Greece will last six years before its projected end in 2016 and, with no return to the markets in sight, the program will depend on promises from European nations to provide more help when the time comes.
The IMF has made loans in other cases where future financing is uncertain, including to Iceland in 2008 and Pakistan in 2009.
“We see there is a gap. …What is key is that the Europeans know there is a gap and whatever the gap is they will have to fill it,” said Poul Thomsen, deputy director of the IMF’s Europe department. “We only went ahead because we got assurances from the European Union that they would provide the money.”