Greece and creditors make progress in bailout talks

21 Feb 17

Greece and its creditors have found some “common ground” following the latest meetings on its stalling €86bn bailout in Brussels yesterday.

Greece Capital Shutterstock.jpg

Greece Capital

Photo: Shutterstock


A deadlock over the terms of the agreement between the Greek government, its European creditors and the International Monetary Fund has been delaying the next tranche of rescue loans for the embattled country, raising the spectre of a Greek default and exit from the euro.

Following a meeting of eurozone finance ministers yesterday, Jeroen Dijsselbloem, president of the Eurogroup, said enough “common ground” had been found for staff from the IMF, European Commission and European Central Bank to return to Greece to discuss a new package of reforms.

However key sticking points in the ongoing dispute, namely the issue of debt relief and questions surrounding ambitious budget surplus targets for Greece, seemed to have been put off until later.

The holdup is down to a disagreement between Greece’s European creditors and the IMF, which as a result has so far refused to participate in the country’s third bailout.

While Dijsselbloem described the meeting as a “good step”, he conceded: “We have to realise there is no agreement, there is no political agreement, at this point.”

The fund argues that Greece requires more substantial debt relief and will need further spending cuts and tax increases to meet a bailout budget surplus requirement of 3.5% of GDP in 2018 and beyond. However it also believes this target is overly ambitious and unnecessary.

Greece’s European creditors are adamant that no further debt relief is needed and that Greece is on track to meet its targets, while a fatigued Greek government is in turn resisting measures that would result in even “one euro” more of austerity.

Dijsselbloem explained that the progress made yesterday means staff from the different parties involved will travel to Athens and discuss a “deeper package” of reforms with the Greek authorities.

These will target the pension and tax systems and the labour market, and be focused on reforming the architecture of the Greek economy rather than austerity.

This is to the “liking of the IMF”, Dijsselbloem noted. The fund has said that no more austerity is needed in Greece and that reforms should be “fiscally neutral”. This also fits with the Greek government’s rejection of further austerity measures.

Dijsselbloem didn’t rule out that the reforms could result in more revenues for Greek coffers. However leeway appears to have been granted to the Greek government in that any additional funds the reforms generate could, with agreement of all parties, be “put back” into the economy if the programme is going to plan.

However more contentious issues appear to seem to have been put on hold awaiting an agreement on the reform package. If that happens, Dijsselbloem explained negotiations will “look again at the fiscal path going forward”, including making it more “realistic”, and debt relief measures.

Whether any of this will be enough to convince the IMF, which has yet to put out a statement on the meeting, to come on board remains to be seen. Without the fund, support for the bailout could falter in key participants like Germany, Greece’s biggest creditor.

Jennifer McKeown, European economist at analysts Capital Economics, highlighted that pension reforms could be difficult to pass and both additional austerity and debt haircuts remained off the table.

As a result, she is “not convinced” a deal will be struck to secure Greece’s future in the eurozone.

She added that Capital Economics agrees with the IMF’s assessment that the budget surplus target cannot be reached and predicts Greek growth of 0.5% this year, as opposed to the 2.7% assumption underlying the bailout, which Europe says Greece is on track to reach.

Dijsselbloem attempted to dilute the urgency that had been surrounding the need for a deal immediately, emphasising the fact that Greece has no short run liquidity issues and that critical debt repayments are not due until July.

But McKeown said: “The longer the current impasse lasts, the more remote seems the prospect of Greece returning to financial markets next year as planned. Accordingly, Grexit and default risks remain significant.”

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