Fourth review of Greek bailout to include all the thorny issues left for last

11 December 2017
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With the third review of the ongoing Greek bailout more-or-less achieved effortlessly and on time, attention will soon turn to the fourth and final review in the spring, as the current memorandum and the attached multi-billion-euro credit line extended by creditors ends in August 2018.
It’s the fourth and last review, however, that is expected to set the tone for the “after-memorandum” period, whereby Greece must essentially cover its borrowing needs from the markets – regardless of whatever “cushion” is provided by the ESM – and at the same time still fulfill future fiscal targets (annual primary budget surpluses as a percentage of GDP) stipulated in the third memorandum.

Both Greek government officials and creditors’ representatives, for the moment, appeared satisfied that the third review went off flawlessly, with a staff level agreement achieved last week. A final “stamp of approval” will come at a Eurogroup meeting this month.
At the same time, one reason that the third memorandum was concluded on time and without much wrangling is the fact that most crucial issues, i.e. political “hot potatoes” for the leftist-rightist coalition government, were bumped to May or June 2018.
No less than nine main issues must be resolved for the fourth and last review of the current and third successive bailout to conclude.
First and foremost, the Tsipras government must implement 84 remaining “prior actions”, or what the Commission calls “key deliverables”.
Creditors and Athens must also come to terms on when the tax-free annual income threshold will be lowered, next year or in 2020. The goal, according to creditors, is to increase Greece’s narrow tax base by including more low wage-earners and pensioners.
Conversely, the coalition government is anxious to activate a positive “off-set” program in 2019, essentially a spending spree timed with the scheduled general election that year. Leftist SYRIZA, the first-past-the-poll party in September 2015, currently trails center-right New Democracy (ND) by double-digit percentage points in all mainstream opinion polls. At the same time, the small rightist-populist Independent Greeks (AN.EL) party, SYRIZA’s “strange bedfellows” junior coalition partner, appears as coming up short of the 3-percent figure, of the general vote, necessary to re-enter Parliament.
As such, any latitude to boost social spending is a welcome prospect for the coalition government in 2019.
Athens and its creditors must also agree on the exact amount of loan money that will be disbursed under the third bailout, given that several billions of euros remain untapped.
The prospect of Greek bonds being included in the ECB’s quantitative easing (QE) program is still open, although the bon-buying program appears to be winding down. Additionally, given its failure to rejoin the liquidity scheme after mid 2015 the Greek government recently downplayed the QE’s significance for the country’s economic recovery.
Another closely watched topic up for discussion is whether Greece’s thrice-recapitalized systemic banks will need another infusion of capital.
Yet another closely scrutinized issue is the timing and exact level of medium-term debt relief measures, in tandem with a proposed precautionary credit line for the Greek state after the end of the third bailout.
Finally, the IMF’s role in the post-memorandum period remains to be clarified.

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