Europe has a message for Greece as it ends its bailouts: Stay on the right path

20 August 2018
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The European Commission — the EU’s executive arm — sent its congratulations to Athens Monday as the government ended years of financial assistance. But there was an important footnote to the message: stick to responsible policies.

“Today we celebrate the end of a very long and difficult journey and I would like to commend the Greek people on their perseverance and resourcefulness,” European Commission Vice President Valdis Dombrovskis told CNBC via email.

“What matters now is to build on this achievement by sticking to sound fiscal and economic policies. This is the way to strengthen confidence in the Greek economy, reap the fruits of reforms, support job creation and attract more investment,” Dombrovskis added.

Greece concluded its third consecutive financial rescue on Monday, putting an end to eight years of austerity measures and financial disbursements from Europe. The current Greek government, led by the leftist Syriza party, came to power in 2015. Prior to signing a new bailout with the European authorities — the third in the wake of the euro zone sovereign debt crisis — Syriza vowed to end austerity and to receive debt forgiveness from its creditors.

But three years down the line, Syriza is only celebrating the end of the bailout program because it implemented hundreds of austerity measures that the European authorities demanded in exchange for additional funding.

George Papaconstantinou, former finance minister of Greece, told CNBC’s “Street Signs” Monday: “I am afraid the answer is not very encouraging yet. If you look at the spreads in the 10-year government bond today, it is not much better when Greece lost access to markets in April 2010.”

He added that the next catalyst for a crisis in Greece is if the current government, or the one after, goes back on the economic commitments.

Some analysts have argued that now that Greece is back standing on its own feet, there are risks that the government will approve more populist measures, including raising salaries and pensions. This risk could become more prominent ahead of a general election next year and with the opposition party, New Democracy, currently ahead in the opinion polls.

“Greece has turned around its economy, which is a major achievement. Now it has to continue to work to put its debt trajectory on the downward path,” Dombrovskis told CNBC.

Greece’s public debt stands at about 180 percent of gross domestic product. In eight years of bailout programs, Greece has received 241.6 billion euros ($281.92 billion).

“This (approach) will lead to a positive change in the way markets perceive Greece and, correspondingly, reduce debt servicing costs. In this regard, staying the course of sound fiscal and economic policies will be key,” Dombrovskis said.

The yield on the 10-year Greek sovereign bond has been quite sensitive to domestic events this year, but more so to external issues such as the Italian elections. It was trading at about 4.33 percent at around 8 a.m. London time on Monday — mostly unchanged to the bailout news as market players had already priced in the end of the program.

Louisa Gouliamaki | AFP | Getty Images
In June, Athens obtained some relief on its debt repayments, which included a 10-year extension in maturities related to its second bailout program, as well as a 10-year deferral on interest payments.

The International Monetary Fund (IMF) said at the time that thanks to this set of measures, Greek debt repayments are not a problem in the medium term. But, in the long run the IMF has doubts about the sustainability of Greece’s debt.

Speaking to CNBC’s “Squawk Box Europe,” Rolf Strauch, chief European economist at the European Stability Mechanism (ESM) — the largest lender to Greece, said the overall direction of the program was right, but it takes a while to see the economic benefits.

He added that Greece is currently enjoying a “reasonable territory” when it comes to financial markets, but “it is up to the Greek authorities to convince markets.”

Source: CNBC

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