ATHENS • The International Monetary Fund (IMF) agreed to a new conditional bailout for Greece, ending two years of speculation over whether it would join in another rescue and giving the seal of approval demanded by many of the country's euro-zone creditors.

The fund said on Thursday that its executive board had approved "in principle" a loan worth US$1.8 billion (S$2.5 billion). Disbursement is contingent on euro-zone countries providing debt relief to Greece.

"As we have said many times, even with full programme implementation, Greece will not be able to restore debt sustainability and needs further debt relief from its European partners," IMF managing director Christine Lagarde said in a statement. "A debt strategy anchored on more realistic assumptions needs to be agreed on. I expect a plan to restore debt sustainability to be agreed on soon between Greece and its European partners."

IMF officials estimate that, even with promised reforms, Greek debt will reach 150 per cent of the gross domestic product by 2030.

European creditors could bring the debt under control by extending grace periods, lengthening debt maturity or deferring interest payments, said IMF in a report accompanying the announcement.

Greek banks will need to undertake another asset-quality review and stress test to ensure they are adequately capitalised before the end of the programme, said Ms Lagarde.

In its debt-analysis assumptions, IMF set aside a buffer of about €10 billion (S$15.9 billion) to cover potential support for banks, which have undergone successive capital rises in the course of Greece's debt crisis, most recently in 2015. This sum might not be enough, said IMF.

The decision to agree on the "precautionary stand-by arrangement" reflects a compromise reached last month between euro-zone finance ministers loath to offer more generous repayment terms to Greece, and IMF, which resisted financing a nation whose debt it deems too high to be paid back in full.

BLOOMBERG