The IMF has announced a new lending facility: the Precautionary and Liquidity Line (PLL). The PLL replaces the Precautionary Credit Line (PCL) and could be aimed at euro area countries such as Italy and/or Spain. An important difference to the PCL is that it can be used either as a liquidity window for six-month period or alternatively under a 12 to 24-month arrangement with maximum lending capacity of 500% of a member's quota for the first year and up to 1000% of quota for the second year (the latter of which could also be brought forward to the first year where needed, following an IMF's Board review). The PLL facility would entail IMF Executive Board reviews every six months.

What would be the maximum loan size for Italy or Spain under an PLL?

Italy's quota at the IMF is SDR7.88bn and Spain's quota is SDR4.02bn (the current USD/SDR exchange rate is 1.48). At current exchange rates, five and ten times quota for Italy corresponds to EUR43bn and EUR86bn, respectively; for Spain, five and ten times quota are EUR22bn and EUR44bn, respectively. This is certainly welcome news for Europe, but clearly, in themselves, these funds are far from sufficient to meet Italy's and Spain's funding needs (in 2012, gross funding needs for Italy and Spain amount to EUR220bn and EUR82bn, respectively, for medium-term bonds of the central government; ie, ex Tbills as well as ex regional funding needs). We need to interpret this enhancement as part of a broader plan that would likely include the EFSF and possibly the ECB.

Qualification criteria

The PLL can be used "under broader circumstances than the previous IMF credit lines, including as insurance against future shocks and as a short-term liquidity window to address the needs of crisis bystanders during times of heightened regional or global stress and break the chains of contagion". Qualification criteria remain the same as under the PCL. A member needs to be assessed as having sound economic fundamentals and institutional policy frameworks, having a track record of implementing sound policies, and remaining committed to maintaining such policies in the future. A member can seek support when it has either a potential or actual balance of payments need at the time of approval of the arrangement (rather than only a potential need, as was required under the PCL).

 
Interest rate charges

If the PLL has the same interest rate charges as the PCL, then the loans are subject to the same charges, surcharges, commitment fees, and repurchase period (3.25 to 5 years) as the Flexible Credit Line and the Stand-by Arrangement (FCL and SBA). Specifically, repayment of borrowed resources under the facility is due within 3.25-5 years of disbursement, which means each disbursement is repaid in eight equal quarterly installments beginning 3.25 years after the date of each disbursement. If funding needs do not materialize, countries pay only a commitment fee which increases with the level of access available over a 12-month period, effectively ranging between 24bp and 27bp for access between 500% and 1000% of quota.

The cost of drawing under the PLL would vary with the scale and duration of financing. The lending rate is tied to the IMF's market-related interest rate, known as the basic rate of charge, which is itself linked to the SDR interest rate. Large loans, with credit outstanding above 300% of quota, carry a surcharge of 200bp. If credit outstanding remains above 300% of quota after three years, the surcharge rises to 300bp. The escalation of the surcharge is designed to discourage large and prolonged use of IMF resources. Currently, the effective interest under the PCL (or an FCL or SBA) for access between 500% and 1000% of quota-ranges between 2.2-2.8%, and about 2.6-3.5% after three years (the interest rates exclude a flat 50bp service charge, which is applied to all Fund disbursements).
 

source: BarCap