Greece bailout programme: Full agreement after marathon negotiations on debt relief between IMF and Eurozone

From left to right: Mr Wolfgang SCHAUBLE, German Federal Minister for Finance; Mr Jeroen DIJSSELBLOEM, President of the Eurogroup; Mr Pierre GRAMEGNA, Luxembourg Minister of Finance.
Date: 24/05/2016. Location: Brussels – Belgium. © European Union, 2016

The Finance ministers of the Eurozone met yesterday in Brussels to discuss mainly on the implementation of Greece’s ESM economic adjustment programme and have come to a final deal which will lead to the conclusion of the first review unlocking the second tranche of 10,3 billion euros.

The Ministers gave a direct assignment to the Euroworking group which will have to confirm whether the Greek legislations are in line with the reforms that have been requested in the last Eurogroup; a mandatory action for completing the review.

The long lasting issue of the Greek debt relief was the major problem and as expected there was not a common path between Germany and the International Monetary Fund (IMF). The IMF supported a debt relief in order to keep on participating to the programme but the biggest economy in Europe didn’t want to “touch” it before the German elections. Nevertheless, both the IMF and Germany though managed to find a common solution compromising to their initial positions.

Greece’s austerity measures

Last Sunday, the Greek parliament voted 1,8 billion euros of measures in order to be in line with their commitments towards their creditors assuring that they will conclude the review. What is more, the government of Alexis Tsipras created a privatization fund to sell off state assets.

The anti-popular measures are about to be reviewed by the technical staff of the Euroworking group and give the green light to whether they comply with the instructions of the Eurozone Finance Ministers. It has been said during yesterday’s meeting that there are some details concerning the pension system, privatizations and the “red” loans which are guaranteed by the Greek state but are not likely to cause major problems regarding the release of the next tranche.

The second tranche

The conclusion of the first review will provide to the country with a loan tranche of 10,3 billion euros. The aforementioned amount will be released in two installments. In June the Greek government will receive 7,5 billion euros whereas the rest 2,8 billion euros will be withdrawal in September.

A large amount though will end up to Greece’s creditors since the country has to repay loans to the IMF and the European Central Bank (ECB) which are due in July. Therefore, the money to support the real economy are even less with the country to have also fallen behind its everyday duties and wages.

Debt relief: The thorn in Eurogroup’s negotiations

The issue of the Greek debt relief was the one that monopolized last night negotiations with the IMF and Germany to support different opinions. On the one hand, the IMF believes that the Greek debt is unsustainable and must be cut posing as an argument also its latest report which reveals that without a haircut the debt will reach 250% of output by 2060.

On the other hand, the European side has made it clear that there will not be a haircut of the debt but Europe will help with the debt burden by using other means. More specifically, the president of Eurogroup, mentioned yesterday at his arrival for the meeting with the other EU Ministers: “an actual haircut of the loan will not happen, there is no support for that in the Eurogroup. What we can look at is the annual debt burden, so can Greece in an annual basis pay its debt and if not we are ready to help them in the coming years and to take away some of those problems.”

However, the IMF “pressed” Europe, with its participation to the programme, to implement debt restructuring measures for Greece in the next years in order to assure its viability. Thus, after long and hard discussions, it is agreed that a three stages (short-term, mid-term, long-term) “roadmap” of debt adjustment will be created. The short-term measures contain debt management by the ESM such as reducing interest rate risks whereas the mid and long-term ones will be applied, if needed, after 2018.

Eurozone Ministers managed to convince the IMF to participate to the programme at the end of the year but the Washington institution will have first to draft a revised Debt Sustainability Assessment in order to evaluate the debt situation and make its final decision.

All in all, Greece managed to receive the approval of the Eurozone Finance Ministers and of the IMF as far as the review of the programme and the sustainability of its debt. The latter has been a very important accomplishment for Greece but was achieved through “harsh” and antipopular tax measures which are most likely to influence negatively, at least in the short-run, the lives of the Greek citizens.