Malta is unlikely to lose the capital loaned to the International Monetary Fund if eurozone countries helped by the organisation are allowed to partially default on their debt, according to the Central Bank of Malta.
“The IMF bears the risk of any possible default,” a CBM spokesman said when asked whether a repeat of the Greek default would threaten the €260 million Malta is expected to lend the IMF.
The money, which the government said would be taken from the Bank’s reserves, is Malta’s share of the European debt deal reached earlier this month, which included a loan of €200 billion to the IMF. In October, eurozone leaders accepted that Greece partially default on its debt, a move that caused panic among banks exposed to Greek sovereign debt.
In an emergency summit earlier this month, EU leaders reiterated that the Greek default was exceptional and would not be repeated.
The money EU countries are expected to lend the IMF will be used to shore up debt-ridden eurozone countries if they become illiquid or insolvent.
Details of Malta’s cash commitment are still sketchy but the CBM spokesman said the €260 million represented the maximum amount the fund could borrow.
“The actual amount that is lent out by the Central Bank depends on future circumstances,” the spokesman said, adding that the currency denomination of the loan, either euro or dollar, still had to be determined.
Malta’s loan to the IMF will earn commercial interest rates but these are unlikely to be very high, given that debt borne by the IMF carries little risk.
The spokesman said the interest rate could not be determined as yet because it depended on the financial conditions at the time of a drawdown and could also be subject to negotiation. Even the repayment period for the loans still had to be determined.
“The IMF is a supranational organisation whose debts carry the lowest possible degree of risk and, accordingly, such debt pays a relatively low interest rate,” the CBM said.
Given the lack of clarity at this stage, it is difficult for the CBM to quantify whether it will make money from the loan when compared to the opportunity cost of earning interest if the money were invested elsewhere.
It said its balance sheet contained assets that spanned across a broad risk spectrum. “Very low-risk assets perform a very important function in the Bank’s portfolio, and IMF debt would be one example of such assets.”