Early IMF loan partial repayment is expected to improve Greece’s financial position and debt sustainability, gaining financial benefits and mitigating foreign exchange risks stemming from IMF’s report, ESM wrote in its letter through which it recommends for the Greek request to be granted.
As it goes on to explain, following its improved access to markets and the boost of investor confidence, Greece has managed to create large-scale liquidity “safety-cushions” that will allow for the early repayment of the more expensive part of the IMF loan. The IMF repayment – to be financed through bond issues completed this year – provides liquidity savings, while it also extends and smooths the repayment profile. IMF repayment is also beneficial for EFSF / ESM creditors.
Analyzing the benefits of the partial IMF loan repayment, it notes that this would reduce the risk of exchange rates, which could lead to an increase in the cost of servicing Greek debt. Repaying part of the liabilities using cash reserves financed at constant funding costs would reduce the vulnerability of the public debt to these risks.
It would also create some financial benefits due to the lower interest rate costs. As it explains, right now the high cost tranche of the IMF loan is Greece’s most expensive debt. The proposed repayment is estimated to result in savings of € 33.08 million by January 2021. These savings represent the difference between the current IMF interest rate of 4.91% and the average coupon interest rate of 3.13% in recent bond issues used to finance repayment. Since the EFSF / ESM interest rates are lower than the Greek market rates, these benefits would not have been materialized had EFSF / ESM not dropped the request for their mandatory payment.
Thirdly, EFSF / ESM in its letter states that early IMF repayment would marginally improve debt sustainability. IMF loans have less maturity and higher costs than the bonds issued by Greece in 2019; therefore, early repayment of this tranche is beneficial in terms of debt sustainability. Based on the Debt Sustainability Analysis of June 2019, prepayment would reduce the debt-to-GDP ratio by 1.1 percentage point in 2019 and by 3 percentage points cumulatively by 2060. Gross financial needs would be reduced by 0.7 percentage points by 2060. /ibna