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. General Agreements To Borrow - ...

    General Agreements to Borrow (GAB) refers to a lending medium ...
  4. Pro-Rata Tranche

    A pro-rata tranche is a portion of a syndicated loan that is ...
  5. Collateralized Loan Obligation ...

    Collateralized loan obligations are securities backed by a pool ...
  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 Grants Egypt $12 Billion Bailout

    The IMF has agreed on a $12B bailout for Egypt
  3. 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.
  4. Insights

    IMF Cuts Global Growth Forecast as Brexit Hits UK

    The IMF cut global growth today. The UK and Nigeria were the two countries that suffered the biggest downgrades
  5. Insights

    IMF, WTO and World Bank: How Do They Differ?

    Understand what IMF, WTO and the World Bank are, how they differ, and why some people question their motives.
  6. Investing

    IMF Or ETF: Which Is Right For You?

    Here's what the professionals think about these similar, but critically different, investment vehicles.
  7. 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.
  8. Investing

    The Week Ahead: April 11-15, 2016

    Market Volatility reared its head again on Thursday, the VIX rallying 10% as stock markets and interest rates fell sharply amidst global growth concerns.
  9. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  10. Personal Finance

    Lines of Credit: The Basics

    Learn how lines of credit, hybrids of credit cards, and normal loans, can help or hurt your finances. Determine what is right for you.
RELATED FAQS
  1. Who Bears the Risk of Bad Debts in Securitization?

    Bad debts arise when borrowers default on loans. But that risk can be split up in different ways. Read Answer >>
  2. What are the Benefits of Credit Ratings?

    Learn how credit ratings are an important tool for borrowers. Typically, the better your credit rating, the better the loan ... Read Answer >>
Trading Center