What Is a 'Credit Tranche'

Credit tranche refers to a system of releasing loan funds in phases that the International Monetary Fund (IMF) uses to govern its lending activities with member countries. When a member nation applies for a loan to help with economic difficulties, the IMF will disburse the loan in a series of credit tranches. The credit tranches are portions of the loan that are released to the member country, usually upon the member fulfilling conditions or requirements set forth by the IMF.

Breaking Down 'Credit Tranche'

Credit tranches are basically the chunks of credit that the IMF makes available to a member country as they make financial reforms according to IMF guidance. Generally the reforms have a free market focus and may include making it easier for entrepreneurs to start businesses, reducing public debt and privatizing nationalized sections of the economy.

How IMF Credit Tranches Work

An International Monetary Fund loan usually lasts between 18 months and three years. At the start of the loan, the borrowing nation must demonstrate that reasonable efforts have been taken to overcome its financial difficulties. If this requirement is met, the country will receive the first credit tranche of the loan, which is usually kept within 25% of a member’s quota. Quota is assigned to new member countries based on their GDP, economic openness and international reserves.

The later series of credit tranches will have additional conditions, each of which the borrower must satisfy before receiving the next portion of funding. The purpose of the conditions is to remove the moral hazard that might be created by the IMF essentially bailing out a country. Instead of merely giving over capital, the IMF requires economic reform to ensure that the country is stable and able to weather future challenges.

IMF Credit Tranches in Action

There are many case studies of IMF successes and failures. Successes include countries like Jordan that have completed an IMF program and have emerged as global economies. Failures are sometimes harder to analyze, as one of the criticisms of the IMF is that social spending suffers under the free market reforms. This no doubt has some truth, but social spending is usually at the point of unsustainable before the IMF comes along with the austerity solution.

The IMF granted a three-year, $12 billion bailout program to Egypt in 2016. After Arab Spring saw Hosni Mubarak’s 30-year regime topple, investors and tourists gave the country a wide berth. This badly damaged the Egyptian economy, and the country’s debt-to-GDP ratio climbed. The first credit tranche of $2.75 billion was released to Egypt in November 2016 following Egypt’s abandonment of a currency peg to the U.S. dollar. The money helped, but so did the depreciation in the currency. Egypt’s GDP growth climbed from 1.8% in 2011 to 4.3% in 2016. Egypt has been making other reforms including bankruptcy reform, labor reform and streamlining the business startup to access further tranches.

RELATED TERMS
  1. Reserve Tranche

    The reserve tranche is a segment of an International Monetary ...
  2. International Monetary Fund - IMF

    The International Monetary Fund is an international organization ...
  3. Tranches

    Tranches are portions of debt or securities that are structured ...
  4. Z Tranche

    Z tranche is a portion of a structured financial product that ...
  5. Active Tranche

    An active tranche is the portion of a collateralized mortgage ...
  6. Companion Tranche

    A companion tranche is designed to provide support to the planned ...
Related Articles
  1. Insights

    An Introduction To The International Monetary Fund (IMF)

    Chances are you've heard of the IMF. But what does it do, and why is it so controversial?
  2. Insights

    IMF Calls For 6-Step Solution to the Euro Crisis

    Discover six points the International Monetary Fund believes the European Union must address in order to continue economic recovery.
  3. Insights

    Is the IMF’s Loan to Ukraine Wasted Money?

    The IMF just approved the next instalment of its loan to Ukraine, but is the aid agency just wasting its money?
  4. Financial Advisor

    Citigroup Cuts U.S. Growth Forecast

    After the recently published IMF forecast report, major banks like Citigroup are also cutting growth projections for the U.S. Here's why.
  5. Tech

    IMF Urges Banks to Invest In Cryptocurrencies

    The International Monetary Fund is pushing for the new wave of digital currencies to occupy a more prominent position.
  6. Insights

    IMF on the 4 Headwinds of U.S. Economic Growth

    Explore the four major economic headwinds that the International Monetary Fund (IMF) identifies as principal obstacles to strong U.S. economic growth.
  7. Insights

    IMF Pressures Eurozone On Greek Debt Deal

    IMF is putting pressure on the Eurozone to strike a deal for Greece to meet their debt obligations
  8. Tech

    IMF Chief Suggests IMFCoin Cryptocurrency as Possibility

    The organization is considering replacing its special drawing rights (SDR) reserve currency with a global digital currency.
  9. Insights

    The World's Fastest Growing (and Shrinking) Economies

    The IMF cut its forecast for 2016 global economic growth Tuesday, estimating that GDP would expand at a rate of 3.2%, rather than the 3.4% forecast in January.
  10. Investing

    Why China Imports Matter to Global Economy

    The Chinese economy is a very important cog in the wheel of the global economy. If Chinese imports slow, the global economic threat is contagion.
RELATED FAQS
  1. How do externalities affect equilibrium and create market failure?

    Learn about the responsibilities of the International Monetary Fund and its functions regarding the international monetary ... Read Answer >>
  2. Revolving Credit vs Line of Credit

    Understand how to differentiate between a line of credit and a revolving credit account, their uses, and how both differ ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center