Eurozone finance ministers agreed to release further tranches of Greece’s bailout and committed to debt relief from 2018. The devil was in the lack of detail.
G reece's breakthrough” agreement with European creditors is another “extend and pretend” deal that does not address the country’s underlying problems, analysts have warned.
Eurozone leaders reached an agreement in the early hours of Wednesday morning to unlock €10.3bn (£7.8bn) in fresh loans, €7.5bn of which will be disbursed by next month to cover debt servicing needs and clear arrears.
After 11 hours of talks and “a few tense moments”, Euclid Tsakalotos, the Greek finance minister, welcomed a tacit commitment by the country’s creditors to significantly reduce Greece’s debt burden.
Jeroen Dijsselbloem, the head of the Eurogroup, hailed the deal as an “important moment” for Athens.
The “breakthrough” also paved the way for the International Monetary Fund (IMF) to participate in Greece’s third bail-out, he said.
“This is an important moment in the long Greek programme, an important moment for all of us, since last summer when we had a major crisis of confidence between us.”
Greek bond yields fell and stock markets rose Wednesday morning after the deal was announced.
Yields on benchmark 10-year debt fell below 7pc for the first time since last November, while yields on two-year government bonds dropped by as much as 150 basis points – or 1.5 percentage points, to 6.6148pc.
The deal means the European Central Bank could reinstate a waiver on Greek bonds as collateral, resulting in cheaper funding for the country’s banks. Lenders have been forced to use emergency funds from Greece’s central bank since February 2015.
Debt relief compromises
Analysts at Societe Generale said the IMF’s decision to back down on demands for “upfront” and “unconditional” debt relief for Greece meant the country remained on “a clear path to disorderly default”.
The IMF accepted that debt relief measures would not be in place until 2018, when Greece’s current rescue package ends.
“The measures proposed by the Eurogroup look vague, are not upfront, and are clearly not large enough to lead to a definite resolution of Greece’s debt problems,” said Yvan Mamalet, an economist at Societe Generale.
“This agreement allows the euro area leaders to continue to play the extend-and pretend game – all the more so as the IMF said future involvement may be considered “at a later date”.
Analysts at Citi said the deal meant Greece would avoid a crisis similar to that of summer 2015, but many questions remained unanswered.
“It leaves Greece’s return to market funding uncertain and probably delays the inclusion of Greek bonds into the ECB’s QE until public debt is deemed sustainable by ECB and EU,” they said in a note.
Poul Thomsen, the IMF’s European director, described the issue of debt relief as “sensitive” for “all sides” saying the fund had made “major concessions” to reach a deal.
“We welcome that it is now recognised by all stakeholders that Greek debt is unsustainable,” he said. In a stark analysis released on the eve of the Brussels meeting, the IMF warned that Greek public debt would soar to 250pc of gross domestic product (GDP) unless creditors took drastic steps to ease the burden.
Mr Thomsen said IMF staff would recommend its participation in the Greek programme to its board “before the end of the year”, provided a new analysis of “measures on the table will deliver the necessary debt relief”.
Wolfgang Schaeuble, described the overnight’s negotiations as “difficult” and he appeared to criticise Christine Lagarde’s absence from the talks.
“It would have been helpful if the [IMF] managing director had been present. That would have saved us a few hours,” he said.
Marc Ostwald, an analyst at ASM investor services, described the deal as another round of “can kicking”.
“[The deal] leaves any decision on genuine debt relief until 2018, after the French and German elections, but also not creating any precedents or short-term crises which might influence the Italian municipal elections, the UK Brexit referendum or the Spanish election in June,” he said.
“It also continues to impose austerity measures, which will continue to strangle the Greek economy, per se ensuring that the next crisis moment in the Greek saga will not be far away.”
Sarah-Jayne Clifton, director of the Jubilee Debt Campaign, described the IMF concessions as a "major climbdown".
"This... once again breaks the IMF’s own rules not to lend when they know a debt cannot be paid," she said.
What was and wasn't included
What they wanted was something concrete and decisive. What they got was vague and non-committal. Greece will receive enough bail-out cash to avoid a repeat of last summer's meltdown. However, the "upfront" commitment to debt relief that the International Monetary Fund had called for was too much for creditors to swallow.
What did Greece secure?
Greece unlocked a €10.3bn tranche of bail-out funds that will ensure the country can pay its bills, service its debts and repay arrears that have built up. The deal removes the risk of Greece defaulting on its €1.5bn due to the IMF and €2.3bn due to the European Central Bank this year.
The ECB now has the green light to reinstate a waiver on Greek bonds as collateral, which will mean cheaper funding for the country's banks. Banks have been surviving on so-called emergency liquidity assistance (ELA) from the Greek central bank since February 2015, when they were cut off from the ECB's standard lending channel.
What about debt relief?
Greece will have to wait until 2018 for any meaningful action to reduce its debt burden. The IMF wanted relief to start with the €10.3bn loan tranche agreed on Tuesday night, which it claimed would send a "strong signal to markets". But Greece could only secure "smoothening of the EFSF repayment profile” - which analysts said was likely to involve changing debt maturities due between 2017 and 2019 by pushing payments into the next decade. Removing extra interest payments on €11.3bn of EFSF (the eurozone's temporary bail-out pot) loans disbursed in 2012 could also help, the Eurogroup said.
The IMF also warned that asking Greece to post primary surpluses (which exclude debt interest payments) of 3.5pc of gross domestic product (GDP) for ten years from 2018 had never been done in an economy so ravaged by recession. A target of 1.5pc of GDP was "within the realm of what is plausible". The Eurogroup stuck with the 3.5pc target.
It also urged European creditors to look at the country's gross financing needs - or the money Greece needs to roll over maturing debt. The IMF's analysis suggested these would need to stay "below 10 percent until about 2040", rising to 20pc by 2060. The Eurogroup said debt relief would focus on "capping Greece’s gross financing needs below 15pc of GDP in the medium-term and 20pc in the long-run".
And in the longer term?
The IMF wanted deep restructuring of all existing official loans to Greece (except its own) to get the country's debt share back on a downward path. Solutions could not be piecemeal. "In other words, solutions that provide only temporary relief but do not deliver a declining debt path over the projection horizon would not be consistent with sustainability," it warned. The IMF called for maturities to be extended by up to 30 years, as well as a 1.5pc cap on interest rates and a moratorium on payments until 2040.
The Eurogroup statement attempted to allay the IMF's concerns. Provided all targets were met, creditors would consider caps on interest rates and deferral of payments in 2018. It said it would also consider returning profits on Greek government bonds held by the eurozone to Athens.
The Eurogroup suggested the European Stability Mechanism (ESM) - or the eurozone's permanent bail-out pot - could buy-out some IMF loans, thus reducing debt servicing costs. Analysts at Citi highlight that there will be just €10bn of IMF loans left by 2018.
EFSF loans could also be re-profiled via maturity extensions and interest payment caps, the Eurogroup said. These total around €131bn of Greece's debt pile.
More worryingly, the statement suggests that these might not be needed at all and would only take place "if an update of the debt sustainability analysis shows they are needed to meet the agreed gross financing needs benchmark”. In short, the Eurogroup will be calling the shots, not the IMF.
Poul Thomsen, the IMF's European director, admitted the Fund had made "major concessions" to secure a deal. However, he stressed that the IMF's participation was still subject to another debt sustainability analysis which it will produce later this year. If the IMF is satisfied, it will participate in Greece's third bail-out, provided it gets the go-ahead from the IMF board.
Citi said there many questions were left unanswered. "It leaves Greece’s return to market funding uncertain and probably delays the inclusion of Greek bonds into the ECB’s QE until public debt is deemed sustainable by ECB/EU," they said.