Greece’s creditors agreed to release €8.5 billion ($9.5 billion) in new loans for Athens, capping a key chapter in the country’s bailout and ending months of uncertainty over whether it could meet large bond payments due in July.
The decision came after euro-area finance ministers sought to offer more clarity on Greece’s future debt path and outline possible measures they could take to ease its burden in the future. Meeting in Luxembourg on Thursday, they reinforced their commitment to extend Greece relief if needed and offered more specifics on what this could entail. But they stopped short of providing definitive steps, which they said would only come at the end of the bailout in mid-2018. The news sent the Athens Stock Exchange to a two-year high Friday.
“It’s a very constructive decision that will help Greece, also on the international market, to gradually get more credibility,” Luxembourg Finance Minister Pierre Gramegna said after the meeting. “The goal is for Greece to go back to the markets in the coming months or year.”
The compromise, nonetheless, leaves Greece with less than what it had sought, as it wasn’t enough to get the International Monetary Fund to acknowledge the country’s debt is sustainable. The Washington-based fund will consider signing off on a 14-month credit line for Greece, but only dole out fresh loans once it receives further assurances on debt relief measures. IMF Managing Director Christine Lagarde said she will propose the “approval in principle” of a new precautionary stand-by arrangement “probably in the range of $2 billion” that would depend on debt-relief measures materializing.
“The bottom line is that, although default was averted, no measures were taken that would create a path leading Greece to financial markets,” said Nicholas Economides, professor of economics at the Stern School of Business, New York University. “At present, a fourth loan agreement in 2018 seems likely.”
The Athens Stock Exchange gained as much as 1.4 percent. Yields on 2-year Greek bonds fell by 20 basis points to 4.78 percent at 10.40 a.m Friday in Athens, close to the yield that the latest bond had been issued at in 2014.
An explicit recognition by the IMF that Greek debt will become sustainable could have cleared the way for the country’s bonds to be included in the European Central Bank’s quantitative easing, which would cut borrowing costs and ease its return to the market — a promise the government in Athens has been making for months. But without the fund’s approval, inclusion in the central bank’s asset-purchase program remains unlikely, according to EU officials.
“We take note of the Eurogroup discussion, which we see as a first step towards securing debt sustainability,” a spokesman of the ECB said in an emailed statement. EU officials have said Greece shouldn’t rely on participating in the ECB’s quantitative easing program, given that it was never a certainty. They’ve pointed out that very few of its bonds are eligible for inclusion.
Still, the deal is a “welcome step” as it “provides breathing space until at the end of the year by quieting noise over Greek politics,” according to analysts at Athens-based Pantelakis Securities. “I’m much happier today than I was a week ago,” Greek Finance Minister Euclid Tsakalotos said after the meeting. “We don’t want the perfect to be the enemy of the good.”
The breakthrough could help lift the veil of uncertainty clouding the economic outlook of Europe’s most indebted state, as it caps debt refinancing costs to 15 percent of its gross domestic product for the medium term, and 20 percent thereafter. Meanwhile, creditors agreed that Greece’s primary surplus, which excludes interest payments and is a key determinant of how much debt relief the country will need, will be around 2 percent of GDP from 2023 until 2060.
Member states also agreed to include an extension of average weighted maturities and the deferral of interest payments on some Greek bailout loans by as much as 15 years. The measures will be triggered next year, to the extent that this will be deemed necessary by a debt sustainability analysis.
Meanwhile, following efforts by the French Finance Ministry, a provision was added to “recalibrate” the debt-reprofiling to account for changes in the country’s growth. The details of this mechanism will only be specified at the end of the bailout, alongside the rest of the debt-relief measures, but the aim is to ensure that if Greece is growing less than expected it would have to repay less of its debt.
In the longer term, “in the case of an unexpectedly more adverse scenario, a contingency mechanism on debt could be activated,” the statement by the ministers said. The mechanism could entail measures such as further re-profiling of Greek loans and the capping and deferral of interest payments, the statement said.
Spanish, Italian Concerns
An issue that could hold back the disbursement concerns legal proceedings in Greece against three technical experts from euro-area counties who advise the country’s privatization fund, according to two EU officials familiar with the discussions who did not wish to be identified because of the sensitivity of the matter. The officials said Spain and Italy, where two of the three experts come from, raised the option of withholding the tranche until the experts’ situation is addressed.
Greece will take all necessary actions to resolve the issue of the three experts under probe, a Greek government official said, speaking on condition of anonymity.
The officials said the issue of the legal costs incurred by the former head of the Greek statistical service, who faced legal proceedings too, were also raised at the ministers’ meeting and could complicate the aid disbursement if not addressed.
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