Greece avoids another bailout trauma

GreeceGerman Finance Minister Wolfgang Schaeuble, left, speaks with from right, European Commissioner for Economy Pierre Moscovici, Greek Finance Minister Euclid Tsakalotos, and French Finance Minister Bruno Le Maire during a meeting of eurogroup finance ministers at the European Council building in Luxembourg on Thursday, June 15, 2017. Eurogroup finance ministers met on Thursday to review the bailout program for Greece. (AP Photo/Geert Vanden Wijngaert)

Greece avoided another potential brush with bankruptcy after striking a deal with European creditors to tide it over for the rest of the year and gained assurances that its repayment burden will be eased when it can stand on its own after nearly a decade on financial life support.

After months of haggling that raised fears of another escalation in Greece’s debt crisis, the 19-country eurozone agreed late Thursday to clear the release of a further 8.5 billion euros ($9.5 billion) after the Greek government delivered on an array of reforms. Getting the money was becoming increasingly urgent as Greece has a big repayment hump next month.

Perhaps more importantly for the longer term, the so-called Eurogroup made clear that it is ready to ease the burden of Greece’s debt repayments at the conclusion of the current bailout program next year. The International Monetary Fund may also get involved financially, on a limited basis of up to $2 billion, but that still requires more detail on the debt relief on offer.

The mere fact that a deal wasn’t postponed, as has occurred so many times previously, allowed investors to breathe a sigh of relief and the main Athens stock index up 1.5 percent in Friday morning trading.

Acknowledging the “impressive” efforts Greece has made to its economy, the European Union’s top official said the broad deal was “mature.”

“I think that’s really the best agreement we’ve had for quite a while, and it gives us the prospective to end the program in time and then to go to a Greek economy which will be, I would say, a normal country inside the eurozone,” he said.

The left-led Greek government, which has lost support since signing up for the country’s third bailout even after campaigning against austerity, hopes the deal will help tap the international bond markets that lost faith in 2010.

“We feel that after this Eurogroup (agreement) there is a much greater clarity for both the Greek people and for financial markets,” Greek Finance Minister Euclid Tsakalotos said.

There is now “light at the end of the tunnel,” he said.

Among the measures offered to Greece was a possible 15-year extension in debt and interest payments due European creditors. Also, following a recommendation from the new French government of President Emmanuel Macron, the possibility was raised of linking Greek repayments to growth, which could mean debt repayments postponed in the event of an adverse shock.

In return, Greece’s government will have to continue with strict budgetary discipline beyond the end of the bailout, including running a budget surplus after debt and interest payments of 3.5 percent of GDP through 2022, and then around 2 percent until 2060.

While conceding that Greece didn’t get everything it wanted, Tsakalotos said the country could now turn the page.

“We recognize that we did not want the perfect to be the enemy of the good,” he said. “And we also recognize that all sides have tried to give and compromise to some extent.”

Under the terms of its 2015 bailout, Greece’s European creditors promised to provide cash and find a way to lighten the country’s long-term debt load — as long as the government kept a lid on spending and reformed the Greek economy.

Despite years of austerity since Greece was first bailed out in 2010, the country’s debt burden still stands at about 320 billion euros, or around 180 percent of Greece’s annual gross domestic product. That’s largely because the Greek economy has contracted by around a quarter, meaning a worsening in the relative size of the nominal debt even when the annual budget has improved markedly.

An outright cut in Greece’s debt is not allowed under euro rules, but the length of time the country has in paying back its debts can be extended, and the interest rates on those debts can be cut. The latter two options are key components of Thursday’s deal, potentially freeing up future money. More comprehensive details should emerge in the coming months.

One of the reasons why Greece’s bailout program stalled over the past few months was a disagreement on debt relief between the eurozone and the IMF, which contributed financially to Greece’s first two bailouts but not the third. Before deciding whether to participate in the latest deal, the IMF still wants more information over the sustainability of Greece’s debt in the long term — its assessment is still different to the eurozone’s.

Christine Lagarde, the IMF’s managing director, said enough progress was made at Thursday’s meeting, particularly with regard to the focus on growth, for her to go to the IMF executive board in Washington to propose the approval in principle of a new stand-by arrangement for Greece. The release of IMF funds would then be contingent on the implementation of the policies and receipt of debt relief assurances.

She said she hoped the agreement in principle will “give confidence to investors on the prospects for the Greek economy to grow and its people to prosper” and that “the discussion over specific debt relief measures can soon be brought to conclusion.”

For austerity-weary Greeks, battered by years of income cuts and tax hikes, the latest deal is unlikely to mean much change any time soon.

Jeroen Dijsselbloem, the eurozone’s top official, singled out the Greek people for their “intense efforts and resolve” over the past few years of the country’s bailout era and that the country was now on course to survive on its own.

“We are now going into the last year of the financial support program for Greece; we will prepare an exit strategy going forward to enable Greece to stand on its own feet again over the course of next year,” he said.

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