IMF changes debt sustainability rules for large bailouts

The International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington, April 18, 2013. REUTERS/Yuri Gripas

WASHINGTON (Reuters) - The International Monetary Fund said on Friday it is leaving the door open to large bailout loans for countries with questionable ability to repay debt, but has revised its rules for such rescues.

Last week, the IMF ended the 2010 lending exemption that allowed major bailout loans to Greece, Ireland and Portugal and helped to ease a European sovereign debt crisis.

In a press release detailing changes in its lending practices, the IMF said it will allow larger loans to countries that do not have a “high probability” of debt sustainability if they are also able to maintain private-sourced credit on terms that allow gradual improvement of their fiscal situation.

IMF officials said doing so may require a reprofiling of existing debt by extending maturities or other terms, but it would be less than a full restructuring that cut interest payments or principal, which they said could disrupt markets.

The aim is to get a debtor country back on its feet more quickly while instilling confidence in the loan program. If private creditors are simply paid off with IMF money, there is less incentive for a country to pursue reforms needed to improve its debt profile.

The changes allow the IMF to still handle debt crises like the one that engulfed Greece in 2010, in which a country’s debt falls in between the Fund’s previous categories of being clearly unsustainable and having a “high probability” of being repaid.

In 2010, the IMF created a “systemic exemption” that allowed it to make a 30 billion euro loan to Greece as part of a wider 110 billion euro bailout that also included the European Union and European Central Bank. The exemption, intended partly to keep the debt crisis from spreading, was later invoked for loans to Ireland and Portugal and has been used dozens of time since.

Republicans in the U.S. Congress required efforts to remove the exemption before they supported legislation in December to implement a long-delayed reform of the Fund’s quota system to give more voting power to emerging markets including China and Brazil.

Reporting by David Lawder; Editing by Paul Simao