Greece Bailout Funding Cleared

The IMF were unwilling to agree to clearing the current payment of funds to Greece under its two IMF/EU bailout accords, despite the fact that the “troika” had recommended that funds be released. The IMF was concerned that an extension of a further two years to the time Greece had to get its debts to agreed levels could mean that it would be unable to meet its obligations. The IMF is not permitted to lend funds to a nation if the recipient would be unable to repay the debt – naturally, the extension of the loan would be associated with additional debt.

The compromise that the IMF and EU came to was that the matter of full payment would be deferred until after Greek had conducted a debt buy-back campaign. The idea was that Greece would conduct a “Dutch auction” to buy back its debt from its creditors at a fraction of the face value. The creditors were attracted to the idea since they would get a guaranteed return on their investment (albeit a significant loss) rather than risk losing it all if Greece were to default. A Greek default would have been all but inevitable if the IMF had blocked release of funds. In the event, Greece was able to buy back €31.9 billion of its bonds for an expenditure of €11 billion, for 33.8% of the face value of the debt. This gives a net debt reduction of €20 billion and is less than the €40 billion face value that the IMF had hoped to see.

The next tranche of funding from the IMF/EU bailout fund, €41.9 billion will now be released. Greece has been waiting for the funds since June and had to turn to the markets for bridge funding. The Greek economy has shrunk by approximately 20% since the crisis began in 2008.