FINANCE: Greece’s early repayment to IMF will improve of its credit metrics

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The European Stability Mechanism approving Greece's early repayment of around €2.7 bln of its roughly €8.4 bln of outstanding debt owed to the International Monetary Fund will improve Athens’ credit metrics, said Moody’s.

It said the repayment will lower the Greek government's interest expense and marginally lengthen its debt's average maturity, improving debt sustainability.

The early repayment comes after capital controls were lifted; the government returned to international bond markets, the European Commission approved the government's ambitious plan to improve banks’ asset quality and amid generally improving economic sentiment.

“Greece’s outstanding obligations to the IMF of around €8.4 billion and the government's early €2.7 bln repayment would retire 2019 and 2020 payment obligations,” said Moody’s analysis.

“Although the IMF is a relatively small creditor for Greece (2.3% of total central government debt), the early repayment is credit positive because the interest rate on IMF loans averages 4.9%, which is significantly higher than what Greece pays on its loans with the ESM and European Financial Stability Facility (EFSF), whose interest rates average 1.4%.”

It is also higher than the 10-year bond Greece reopened in October, which yields 1.5%, and the 1.9% yield on the seven-year bond it issued in

By repaying a portion of its debt to the IMF early, Greece expects to save around €70 mln, or around 1.2% of its interest expense.

The government will still need to repay the IMF principal and interest of €1.9-€2 bln annually during 2021-23, and around €300 mln in 2024.

“Nevertheless, Greece’s repayment profile over the coming years is easily manageable.”

The early repayment follows other recent credit positive developments, such as the full abolition of capital controls on 1 September and the government’s success issuing bonds in international capital markets.

Since the end of Greece’s last adjustment programme in August 2018, the government has raised €9 bln by issuing bonds at successively lower interest rates.

“The implementation of the government’s proposed asset protection scheme (APS) for the banking system, which received European Commission approval on 10 October is potentially even more significant than the early repayment to the IMF,” said Moody’s.

It said the APS (modelled on a similar and highly successful scheme in Italy) will help banks reduce their large stock of nonperforming exposures (NPEs), which comprised around 43.6% of gross loans in June.

“The banking system's large stock of NPEs is currently its biggest challenge.”

“Although the formation of new NPEs is declining, Greek banks have the highest problem loan ratios in our rating universe, despite improvement in recent years,” warned Moody’s.