REPORT TO CONGRESS ON

THE INTERNATIONAL MONETARY FUND’S

LOANS TO St. KITTS & NEVIS AND GREECE

A Report to Congress

consistent with

Section 1501 of the

Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010

United States Department of the Treasury

June 2012
Introduction 

Consistent with section 1501 of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act, 2010,

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 this report provides an annual update of the assessment of the likelihood that the 

International Monetary Fund (IMF or Fund) loans made to St. Kitts & Nevis (SKN) and to 

Greece will be repaid in full, including these countries’ debt status, vulnerabilities, and debt 

management strategy. 

As directed by section 1501, and consistent with its longstanding practice with respect to all 

loans, the Office of the United States Executive Director (USED) at the IMF, in close 

coordination with the Treasury Department, conducted a careful and thorough evaluation of the 

proposals for the SKN and Greece programs submitted to the IMF Executive Board given that 

these countries’ debt-to-GDP ratio exceeded 100 percent and they are not eligible for assistance 

from the International Development Association.

St Kitts & Nevis

On July 27, 2011, the IMF Executive Board approved an $84 million Stand-By Arrangement 

(SBA) for SKN. The second review of the IMF program was completed by the IMF Board on 

May 21, 2012. All program targets for the end-December 2011 reference period were met, and 

the structural benchmarks were completed. A disbursement of $4.8 million was approved 

bringing total funding disbursed to SKN under the program so far to $58.1 million.

Program Performance

The overall fiscal balance in 2011 was a surplus of $15.4 million (1.8 percent of GDP), 

significantly above the program target of a $12.7 million deficit. Tax revenue was broadly in 

line with expectations while non-tax revenue far exceeded the projection made at the time of the 

first review, due to strong performance of the citizenship-by-investment program, transfers from 

the Sugar Industry Diversification Foundation, and dividend receipts. Overall, expenditure was 

lower than what had been projected, with restraint in current outlays, especially on goods and 

services, offsetting higher capital spending.

The authorities completed the four structural benchmarks required during the period of the 

review, which included: (1) submitting to Cabinet a proposal to rationalize the subsidy on 

liquefied petroleum gas; (2) reviewing the borrowing capacity of public enterprises; (3) 

submitting the social safety net reform strategy to Cabinet; and, (4) updating the stress tests of 

the SKN banks.

 

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P.L. 111-203; codified at 22 U.S.C. 286tt(b), section 68(b) of the Bretton Woods Agreements 

Act: “Within 30 days after the Board of Executive Directors of the Fund approves a proposal [to 

make a loan to a country whose public debt exceeds gross domestic product and is not eligible 

for assistance from the International Development Association] and annually thereafter by June 

30, for the duration of any program approved under such proposals, the Secretary of the Treasury 

shall report in writing . . . assessing the likelihood that loans made pursuant to such proposals 

will be repaid in full . . . .” 
Debt Status

The authorities concluded a successful debt exchange with bondholders and external commercial 

creditors on April 18, 2012. The exchange offer covered $135 million of eligible claims, 

equivalent to about 19 percent of GDP. Creditor participation was strong, reaching 97 percent. 

In addition, further progress has been made with respect to the resolution of domestic loans, 

including on the conversion of loans secured with land. A shareholders’ agreement was signed 

which determines the parameters of an exchange of approximately $330 million of secured loans 

for land and equity in a new special purpose vehicle (SPV) that will manage land sales. Next 

steps involve the establishment of the SPV and the transfers of the land. In addition, the terms of 

unsecured domestic debt (mainly owed to commercial banks and a minority portion of domestic 

debt) is being negotiated to further reduce SKN’s debt servicing burden.

Based on these actions and the current economic outlook, IMF staff estimates that the eventual 

scale of the debt restructuring will lead to a reduction in total public debt from 154 percent of 

GDP at end-2011 to about 100 percent of GDP at end-2012. This will set debt on a trajectory to 

fall within the Eastern Caribbean Currency Union (ECCU) target of 60 percent of GDP by end2020. 

SKN has relied heavily on short-term financing, with (primarily 91-day) T-bills and overdrafts 

representing roughly 21 percent of total public debt before the debt restructuring. Once the 

restructuring of remaining debt is complete, IMF staff estimate that T-bills will represent 20-25 

percent of total debt. The maturity extension of the remaining unsecured loans will help 

lengthen the overall maturity profile. 

Debt Management Strategy

The government’s primary objective is to place SKN’s public debt on a downward trajectory, 

aimed at achieving a 60 percent debt-to-GDP ratio by 2020. The debt restructuring is providing 

significant momentum to achieve this goal. In addition, under the program the government is 

committed to running primary surpluses that reduce the need for additional debt and allow for a 

reduction in outstanding debt. 

Vulnerabilities 

SKN’s primary external vulnerabilities remain its exposure to the U.S. economy and natural 

disasters. Tourism receipts are equivalent to 15 to 25 percent of GDP, and the United States is 

SKN’s primary tourism market. As such, a downturn and/or continued high unemployment in 

the United States would negatively impact SKN tourism receipts and foreign investment inflows. 

Like other small Caribbean island economies, SKN is also vulnerable to natural disasters. For 

example, the last hurricane to strike SKN, in late 2008, resulted in the extended closure of a 

major hotel on Nevis, adversely impacting the SKN tourism industry. Savings gained from 

planned fiscal consolidation and debt restructuring under the IMF program should help to 

provide a cushion for the government to guard against and mitigate these vulnerabilities.
SKN’s primary internal vulnerability is the large exposure of its banking sector to government 

debt. The authorities and IMF staff are monitoring the impact of the restructuring on domestic 

banks closely for any signs of strain. Preliminary stress tests that the Eastern Caribbean Central 

Bank (ECCB) conducted were updated and confirm that the banking sector will have sufficient 

capital to absorb the impact of the ongoing government debt restructuring. Moreover, the 

Banking Sector Reserve Fund, established with financing from the IMF as part of its program, 

remains in place to provide a liquidity backstop to banks if required to help address 

vulnerabilities arising in the financial sector. 

Overall Assessment

SKN remains heavily indebted and vulnerable. However, its IMF-supported program, combined 

with the debt restructuring, is providing the best opportunity for the country to return to a 

sustainable debt path and mitigate its vulnerabilities. IMF resources will continue to be 

safeguarded by the following:

 Demonstrated SKN government commitment to implement the policy measures that are a 

precondition of subsequent IMF financing under the program. Performance under the IMF 

program has been very strong with all targets having been met.

 Completion of a debt restructuring on external debt and bonds that reached 97 percent in 

creditor participation for $135 million of eligible debt. 

 Significant progress in the debt restructuring process of domestic creditors in the context of a 

debt-for-land swap. 

 IMF financial support and policy guidance, which will help to fill SKN’s financing gap, 

mitigate vulnerabilities by backstopping the banking sector during the debt restructuring, and 

ensure sound policies.

 Strong IMF program conditionality and rigorous quarterly reviews. 

 The IMF’s preferred creditor status, ensuring that it is repaid ahead of all other creditors. 

 Agreement with the Paris Club to reschedule principal payments over the term of the IMF 

program.

With these factors in mind, the Treasury Department continues to assess that the IMF’s loan to 

SKN is most likely to be repaid in full. 

Greece

On March 15, 2012, the IMF Executive Board approved a $36.7 billion Extended Fund Facility 

(EFF) for Greece. Greece’s economic reform program is a critical part of a broader European 

effort to promote EU and global financial stability. Europe’s stability is critical for avoiding 

global financial contagion and safeguarding the U.S. economic recovery. Given the IMF’s 
wealth of experience designing credible economic adjustment programs, its engagement 

alongside the European Union to help restore macroeconomic and financial stability is very 

much in the best interests of the United States. 

Greek parliamentary elections took place on Sunday, June 17, 2012. A new government was 

sworn in on Wednesday, June 20, led by New Democracy, together with PASOK and 

Democratic Left. New Democracy and PASOK parties, which have a parliamentary majority by 

themselves (162 of 300 seats), were signatories to a letter of support for the EU/IMF program 

approved in March. The European Commission and IMF are expected to engage with the new 

government to assess program implementation to date and to discuss policy actions that would 

allow continuation of the EU/IMF program.

Debt Status

Since the last report to Congress on Greece’s IMF program on April 13, no further data on 

Greece’s debt has been released. As noted in the last report, as of December 2011 (the latest date 

for which data are available), the Greek government’s debt was $470 billion, equivalent to 165.3 

percent of 2011 GDP. Approximately $258 billion in debt was subject to the debt exchange, and 

the face value of debt owed to the private sector was halved according to estimates. The debt 

exchange entailed a deep write down for bondholders; in net present value terms losses range 

from 70 to 75 percent. Debt owed to the official sector is projected to increase substantially with 

the approval of the EU/IMF program. The bulk of the increase ($149 billion of the $158 billion 

increase) will be owed to other EU member states, which in addition to program financing, have 

financed the up-front costs of the debt exchange, including by providing the EFSF notes to be 

used in the exchange and helping to recapitalize Greek banks which suffered losses on their 

holdings of Greek government debt. As noted in the last report, and based on full 

implementation of the program, the IMF expects that Greece’s debt-to-GDP ratio would decline 

from 165.3 percent of GDP at end-2010 to roughly 116.5 percent of GDP by 2020. 

Debt Management Strategy

The Greek government’s primary objective continues to be placing its public debt on a 

downward trajectory, aimed at achieving a debt-to-GDP ratio of about 120 percent by 2020. To 

meet this objective, in addition to the private debt exchange, the government is undertaking fiscal 

consolidation aimed at achieving and maintaining a primary surplus that reduces the need for 

additional debt and allows for a reduction in outstanding debt. In addition, the Greek 

government has committed to undertaking significant privatizations. The authorities are aiming 

to regain medium- and long-term market access in the period after the program. 

Vulnerabilities 

The Greek authorities have committed to an ambitious package of reforms to regain growth and 

competitiveness that will take time to implement and bear fruit. There are significant headwinds 

to improving economic growth in the near term, including fiscal consolidation, the need to regain 

competitiveness through wage restraint and price reductions, and deleveraging in the financial 
sector. Protracted economic stagnation and political risk could hinder fiscal consolidation efforts 

and put additional pressure on the banking sector and represents a key vulnerability. 

Overall Assessment

Greece is heavily indebted and vulnerable. However, its EU/IMF-supported economic reform 

program, combined with the restructuring of private sector debt, provides the best opportunity 

for the country to return to a sustainable debt path and lower its vulnerabilities. The IMF 

program was carefully designed to address the significant vulnerabilities facing Greece, limit the 

IMF’s own exposure and link it clearly to Greece’s performance, and to enhance the likelihood 

of the IMF being repaid. 

IMF resources will be safeguarded by the following:

 The government has already completed a large debt exchange that sharply reduced the face 

value of its privately held debt. Without this restructuring, the government’s debt would 

have risen to unsustainable levels.

 The IMF program includes strong conditionality and rigorous quarterly reviews. Program 

conditionality agreed to by the government focuses on the following areas: fiscal 

consolidation aimed at achieving debt sustainability over the medium-term; strengthening 

public financial management; reforming the social transfer system and improving its 

effectiveness; and, enhancing the stability of the financial sector. 

 The IMF’s lending to Greece is set be repaid over a much shorter time horizon (4.5-10 years) 

than that of the European contributions (25 years with a 10-year grace period) and the 

restructured privately-held Greek government bonds (30 years with a 10-year grace).

 The Eurogroup has made financing assurances to provide long-term support to Greece on 

adequate terms provided that Greece continues to adhere to program policies.

 The IMF’s preferred creditor status, ensuring that it is repaid ahead of all other creditors. 

With these factors in mind, the Treasury Department continues to assess that the IMF’s loan to 

Greece is likely to be repaid in full.