The Strategist

Eurogroup says yes to Greece bailout payment

06/16/2017 - 14:59

The finance ministers of the euro area agreed on Thursday to allocate another tranche of € 8.5 billion within € 86 billion aid package to Greece, agreed in mid-2015. This will allow Athens to avoid default in early July, when the country should repay some of its debts. Brussels also promised to ease the debt burden of the country, indicating a possibility of extending the maturity of loans. At that, the International Monetary Fund, which initially insisted on writing off part of the debt, now says it is ready to "principally" join the program.

(Mick Baker)rooster via flickr
(Mick Baker)rooster via flickr
Greece will receive a larger than expected tranche of financial assistance of € 8.5 billion, the finance ministers of the euro area agreed at a meeting on Thursday. Head of the International Monetary Fund (IMF) Christine Lagarde took part in the negotiations. Athens needs the money to pay off obligations of € 7 billion to the ECB on bonds on the regulator’s balance sheet (maturity on July 7). The lenders also noted that Greece approved all the reforms agreed at the beginning of the program, in particular the pension system and the labor market.

Recall that the current, the third program of financial aid to Greece in the amount of € 86 billion was agreed in mid-2015 and ends next year. The IMF initially refused to participate, as it could not convince the European creditors to write off or restructure a substantial part of the debt. The fund insists that the current level of debt burden (about 180% of GDP, € 320 billion) is unsustainable. The organization is waiting for the Eurogroup to decide on the debt parameters at the end of the current program. German Finance Minister Wolfgang Schaeuble, in turn, said that a new tranche would not be allocated without IMF participation - this is a condition in which the country's parliament will agree to grant financial assistance to Greece.

Brussels assumed that if Greece complies with the parameters of the primary surplus (before interest payments) in 3.5% of GDP, then the write-off will not be required. In the end, the dispute turned into a discussion whether the Greek economy will grow at a rather high rate. So, according to IMF estimates, the primary surplus will not exceed 1.5% in the context of GDP growth in the medium term by about 1% per year. The IMF believed that the country cannot send more than 10% of GDP per year to service debt, while Brussels hopes for solid 15-20%. The country will be able to service debt on its own only if the debt is reduced by about 36% of GDP by 2040 (which is 20% less than under the current reform program), the fund considered earlier.

However, last week Christine Lagarde stated that the fund can support the program "in principle". As a result of yesterday's meeting it became known that the fund is ready to issue a loan of $ 2 billion, but this can happen only when the details of easing the debt burden of Athens are clear. The Eurogroup, in turn, now points to a possibility of extending the average maturity of loans granted to Greece from the current 30 years to 45, as well as linking the volume of payments to growth rates (they will be lower during the crisis). In return, Athens will have to adhere to the primary surplus of 3.5% of GDP to 2022 and 2% of GDP to 2060. However, specific parameters for debt relief will be discussed additionally, Head of the Eurogroup, Jeroen Dijsselbloem, said. There is still no question of writing off part of the main debt, for which Athens was hoping.


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