The finance ministers of the eurozone early Wednesday agreed on a new set of funding measures for Greece that was bolder than forecast but nonetheless falls way short of the radical steps needed to put Athens on a sound financial path.
One of the package’s most important consequences of the compromise agreement will be to allow the International Monetary Fund to continue participating in the Greek financial rescue.
The Eurogroup of finance ministers agreed on the initial details of a debt-relief program for Greece without giving specific figures.
Eurogroup president, Jeroen Dijsselbloem, hailed the agreement as a “major breakthrough” that signalled the beginning of a new phase in the Greek bailout programme.
The IMF welcomed the deal and said it will continue to participate in the bailout, despite its demands for Greece to be offered “upfront” and “unconditional” debt relief not being met.
Athens will receive the new bailout funds in two instalments – €7.5bn in June 2016 that will be used to repay the creditors in the course of the next two months and €2.8bn in September 2016 conditional to further review of the implementation of legislation to feed into the ‘real economy’ – mostly to honour state debts to contractors and VAT returns.
The Eurogroup deal may once again be seen as a messy compromise mostly aimed at playing for time. Once again, it can be criticized for skirting the radical decisions that would allow Greece to stand on a firmer footing. And once again, it will be seen as a cynical ploy to avoid those decisions because of electoral politics: in this case, postponing major choices until after the 2018 German elections.
The debt relief effort will be framed by an overall cap of the country’s debt service. Greece’s “gross financial needs” will remain below 15 percent of GDP in the medium term and 20 percent thereafter, the Eurogroup stated. That was a key demand from the IMF, which in theory cannot participate in a program what doesn’t show a clear path towards debt sustainability for the beneficiary country.
This will be done first by short-term re-profiling of the country’s loans, such as waiving an interest rate hike that should have taken place in 2017 on tranches from the second Greek bailout, agreed in 2012, and making the country take advantage of the low interest rates environment currently benefiting the European Stability Mechanism (the eurozone bailout fund), which funds itself on the markets.
More measures will follow in the medium term, if a review “shows they are needed,” the Eurogroup stated. As for the long term, “the Eurogroup is confident that the implementation of this agreement on the main features for debt measures … will bring Greece’s public debt back on a sustainable path over the medium to long run and will facilitate a gradual return to market financing” but creditors chose to “not quantify” the debt-relief measures.
The plan overall marks progress compared to the simple principle of debt relief formally promised to Greece last year as part of its agreement on tough austerity measures to clinch the country’s third bailout. The first details will allow IMF management to recommend to the institution’s board that it maintains its involvement in the Greek rescue.
The board’s approval, even though Managing Director Christine Lagarde recommends the deal, shouldn’t be taken for granted, however. As the Eurogroup stated, “the possible debt relief will be delivered at the end of the program in mid-2018” (after major national elections in Germany and in France).
concessions on both sides allowed the can to be kicked down the road once again. But the assumptions behind the scenario remain as fragile as ever — notably the 3.5 percent of GDP primary fiscal surplus target forced on Athens, but deemed “unnecessary and unattainable” by the IMF.
Zero Hedge summarised the deal as follows: Greece has promised to implement even more Draconian measures (which may or may not happen) in order to get money that was already promised to it, while the Eurogroup disburses just enough cash to cover the immediate funding needs of the creditors with a little left over to pay for government arrears while demanding even more austerity; future tranches may or may not be paid out if Greece complies with its promises (which will not happen) and meanwhile the Eurogroup says it may someday provide debt relief, once Greece ends its bailout program… which will never happen.
Sources: Politico.eu, IBT, ZeroHedge
