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May 25, 2016

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Debt relief - the fudged version

If you need to fudge a debt relief agreement, the eurogroup is probably the one organisation that can deliver it, and it delivered it last night. A 12-hour marathon meeting with some dramatic moments ended at about 2am this morning with a statement, a staggered and conditional disbursement of €10.3bn, and a "soft" debt relief plan with no numbers but benchmark criteria. The eurogroup agreed on debt relief measures to be phased in progressively, and "as necessary to meet the agreed benchmark on gross financing needs." Sounds to us like Germany prevailed in most of what it wanted.

The IMF representative Poul Thomsen said the agreed measures were in line with the funds’ debt sustainability criteria. He will now recommend to the IMF's executive board to provide further financial assistance to Greece, contingent on a new set of debt sustainability calculations. Thomsen admitted that the Fund made a big concession by agreeing that debt relief would only be finally decided in 2018, rather than up-front. Reading through the eurogroup statement we find that the fund caved in on other aspects as well, at least compared to what had been laid out in the debt sustainability analysis:

  • The new benchmark for debt relief is that Greece’s gross financing needs should be kept below 15% of GDP in the medium term and below 20% beyond that. This is higher than the 10% the IMF staff wanted up to 2040.
  • The Europeans did not budge on their fiscal target, insisting on a primary surplus of 3.5% of GDP rather than the 1.5% recommended by the IMF staff. This could be revised, but only after 2018.
  • Debt relief measures were not quantified but made to fit, Jeroen Dijsselbloem said according to the FT. This very much sounds ike they papered over the differences. We wonder how this will translates into a new set of debt calculations by the IMF. 
  • There is no unconditional offer for after 2018, as the DSA analysis of the IMF staff had called for. Medium-term debt relief will only be granted if deemed necessary, and is conditional upon successful completion of the programme and a renewed assessment of debt sustainability. 
  • What long-term debt relief means, nobody really seems to know. The Eurogroup statement describes it as a contingent mechanism that will intervene if an adverse scenario materialises. It will be conditional on Greece complying with the requirements of the SGP. The statement says that such a mechanism could entail measures such as a further EFSF debt reprofiling, and capping and deferral of interest payments, but what this concretely means is not clear. Also if we are seriously talking about capping interest rates, European lenders need to provide a guarantee to cover for eventual ESM losses. Not surprisingly, we find no reference to this in the statement.
  • From all the above, it is clear that this is not going to deliver a 50% cut to the net present value of Greek debt by 2060 as the IMF had called for.

As for the disbursement, the finance ministers approved the release of €10.3bn in new funds for Greece, broken down in two tranches. About 18 prior actions were found not to be entirely completed, though not enough to block the disbursement. Greece will now receive €7.5bn in June to cover its debt servicing needs and reduce some of its domestic arrears. Not without conditions, of course. The Greek government will correct some of the laws passed on Sunday. Eurogroup members were reportedly furious that Syriza changed the pensioners' solidarity benefit EKAS without the creditors' consent. They also want the Greek government to lift the protection it put in place for state-guaranteed loans under the nonperforming loan liberalisation, according to Macropolis. And they expect Greece to fulfil prior actions on privatisation, which presumably involves the parliamentary ratification of the deal for the former airport site at Hellenikon. The second tranche will follow after the summer, also meant to be spent on arrears and debt service. This tranche, at least the part to be used for debt repayment, is conditioned on Athens clearing milestones on privatisation, bank governance, the new independent revenue agency, and the energy sector.

Our other stories

We also have stories on Erdogan’s threat to pull out of the refugee deal; on Rajoy leaping ahead with fiscal commitments for the next Spanish government; on Renzi ready to compromise on labour reform in view of the 2018 elections; on the unsimple and untransparent securitisations proposal; on the latest poll trends against Brexit; and on why the AfD is there to stay.

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