Greece, lenders reach long-awaited deal on bailout reforms

Greek Finance Minister Euclid Tsakalotos (L), European Economic and Financial Affairs Commissioner Pierre Moscovici (C) and Dutch Finance Minister and Eurogroup President Jeroen Dijsselbloem take part in a eurozone finance ministers meeting in Brussels, Belgium March 20, 2017. REUTERS/Yves Herman

Reuters — Greece and its foreign creditors reached a deal early on Tuesday on a package of bailout-mandated ‘reforms’, Greek Finance Minister Euclid Tsakalotos said, paving the way for the disbursement of further funds greece requires for repayment of loans to the European institutions.

“The negotiations for a technical deal were concluded on all issues… the way has now been paved for debt relief talks.” Tsakalotos told reporters.

Talks on the deal, which includes labour and energy reforms as well as pension cuts and tax rises, had dragged on for half a year mainly due to a rift between the European Union and the International Monetary Fund over fiscal targets.

Greece now needs to legislate the new measures before euro zone finance ministers approve the disbursement of loans, money Athens needs to repay 7.5 billion euros in debt maturing in July. The next scheduled Eurogroup meeting is on May 22, where reducing Greece’s debt will also be discussed.

As part of the reforms, Athens has promised to cut pensions once again in 2019 and reduce the tax-free threshold to 5700 euro in 2020 to produce savings worth 2 percent of gross domestic product.

Greece yielded to a number of demands set by its creditors, including pension cuts and a lower tax-free threshold of around 5,700 to 6,000 euros from 8,636 euros now. (at risk of poverty income threshold for a family of 4 set at 9475 euro for Greece – Eurostat figures). The agreement will also allow more shops to be able to work on Sundays in various areas throughout the country. “The discussion for an agreement that secures Greek debt’s sustainability now begins,” Greek Finance Minister Euclid Tsakalotos told reporters in Athens after the meeting.

It is not clear if Germany has made an undertaking to offer debt relief to Greece. Schaeuble has argued in the past that if Greece achieves these surplus targets there will be no need for relief measures.

There is no guarantee that Greece will be accepted in the QE programme of the European central bank either as the Bank’s president, Mario Draghi has made it clear that the ECB will need to carry out its own independent debt sustainability assessment before it allows Greece in the QE programme.

If Greece beats its targets, the government will be able to implement a number of offsetting measures to ease the austerity burden, including subsidies for rent of as much as 1,000 euros per year, as much as 250 million euros in child support and lower contributions to medication for those of lower income, a Greek government official, who spoke on condition of anonymity said. Collective bargaining for Greek employees will be reinstated starting September 2018, the official said.

If it outperforms its targets it will be allowed to activate a set of measures offsetting the impact of the additional austerity, which includes mainly lowering taxes.

Following Tuesday’s agreement, the lenders are likely to decide amongst themselves on Greece’s medium-term primary surplus targets, a key element for granting further debt relief.

The IMF says Greece cannot maintain high primary surpluses unless it adopts more austerity and is granted further debt relief by the EU.

In a draft document seen by Reuters, the Fund says Greece can reach a primary surplus of 2.2 percent in 2018 and aim at 3.5 percent annually in 2019-2021, if it implements the new measures agreed with its lenders. It suggests the primary surplus target be reduced to 1.5 percent of GDP thereafter.

Its euro zone lenders believe Greece can sustain a 3.5 percent GDP primary surplus target over a longer period.