Greece, Creditors Strike Deal on the Conditions for Fresh Cash

4 December 2017
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Greece and its international creditors agreed on a set of economic overhauls the country must undertake in exchange for fresh loans, paving the way for a payment that will help it build a cash buffer as it seeks to prepare for its bailout exit.

The so-called staff level agreement came after a week of talks in Athens saw the two sides reach common ground on politically sensitive issues such as reforms in the energy sector, public administration, the financial system, social-cohesion programs and fiscal performance among others.

“We reached the staff-level agreement” Finance Minister Euclid Tsakalotos said after the last meeting with creditor’s representatives in Athens. Greece is going to implement as soon as possible all the measures needed in order to get fresh bailout money, he added. After January’s Eurogroup, Tsakalotos expects that discussions will start for further debt relief, the fourth bailout review that is expected to conclude in May or June, and for exiting the crisis.

The deal marks the completion of a key step in the negotiations between Athens and the auditors of its aid program — representing euro-area governments and the International Monetary Fund — as the country is starting to prepare for its post-bailout life. A successful conclusion of the current review will not only entail the release of fresh loans but it will also help Greece regain the trust of investors, as it plans to tap financial markets again.

The continent’s most indebted state was the first euro-area nation to seek a lifeline from its peers in 2010 and the only one still reliant on such concessional loans to stay afloat. Additional bond sales are a crucial step in the efforts to build up a post-program cash cushion and ensure it can stand on its own feet without external help.

“Looking ahead, our baseline remains that Greece will achieve a clean exit from the bailout program when it ends next summer,” Wolfango Piccoli, co-president of Teneo Intelligence said in a note to clients. “To this aim, Greece would need to build a buffer of around 12-15 billion euros ahead of its exit from the program.”

Cash-for-Reforms

Still, the Greek government will first have to implement a long list of around 100 overhauls before it can receive any fresh disbursements and formally conclude the ongoing audit of its bailout. Some measures will be voted in December while an omnibus bill to implement the remaining prior actions must be voted in parliament before Jan. 11.

Once Greece has undertaken the agreed reforms, euro-area finance ministry deputies can examine whether Athens has fully complied with the conditions attached to its bailout at a meeting on Jan. 11 and green-light the disbursement of fresh loans, which could take place by mid-February, an EU official said on Dec. 1, speaking on condition of anonymity.

One issue that has raised eyebrows among creditors and could pose some risks concerns the ongoing legal proceedings in Greece against European experts who have in the past advised the government on privatizations. While the matter is unlikely to hold up the conclusion of the bailout review, it has been a persistent source of frustration among some euro-area officials.

Regaining Trust

The staff-level agreement came as Athens has stepped up its efforts to quickly finalize outstanding reforms attached to its bailout, which is set to run until August. This is because prolonged and acrimonious negotiations could harm its chances of convincing bond investors that it’s committed to keeping its house in order, and would likely draw the ire of its euro-area creditors at a time when they are expected to discuss granting Greece further debt relief.

The government’s plan is to issue a new bond of three- or seven-years maturity right after January’s meeting of euro-area finance ministers, which is expected to sign off that the country fully complies with the strings attached to its rescue program. Greece will try to raise at least 6 billion euros ($7.1 billion) by the end of the program by issuing two or three new notes until then, in order to build a cash buffer of 15 billion euros, including the loans from the European Stability Mechanism.

Talks on how to ease Greece’s bailout-loan repayments are set to resume in 2018, even though any relief will only be granted to Athens once it successfully concludes all the reforms outlined in its program. The outcome of discussions on debt, however, is important not just for Greece’s ability to repay what it owes in the coming decades but also because it will determine whether the IMF decides to assert that the rescue program is credible — a key precondition for several euro-area creditors in the past.

Having co-funded Greece’s last two bailouts, the Washington-based Fund has so far opted not to participate with cash in the third one, insisting further steps need to be taken first to ensure the sustainability of the country’s debt. While it is unlikely that the debt relief the euro-area is willing to commit to will be seen as sufficient by the IMF, any discussion on debt in the coming months could determine for good whether the Fund will extend any further loans to Greece.

Source: Bloomberg

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