The Strategist

Greece tightens the belt once again

05/03/2017 - 15:01

Greece and a group of international lenders have reached a preliminary agreement on the allocation of the next tranche of € 7 billion to Athens in the framework of the bailout program. The agreement, which is yet to be approved by the euro zone finance ministers and the Greek parliament, includes new cuts in pensions, tax increases, opening of the energy market and a change in labor legislation. The agreement opens a way for the IMF to participate in the country's financial assistance program in case the Eurogroup’s members agree on debt restructuring.

"Negotiations on the technical part of the deal have been fully completed... A way for discussing a partial debt write-off has been opened", said Greek Finance Minister Euclid Tsakalotos. Voting in the parliament is scheduled for May 16, and a regular meeting of the Eurogroup is expected to deliver a decision whether or not to the grant loan on May 22. The tranche will allow Greece to pay off obligations of € 6 billion, which expire in July, and thus avoid default.

The agreement on additional fiscal reforms removes one of the obstacles that kept the International Monetary Fund (IMF) from participating in the program of assistance to Greece. However, the issue of debt restructuring is still on the agenda, the organization’s representative said. Dimitris Tzanakopoulos, an official representative of the Greek government, expressed a hope that this decision could also be made at the Eurogroup’s meeting.

In fact, the current agreement’s terms are in line with the recommendations of the Board of Governors of the IMF, promulgated in February. The fund then urged the Greek authorities to expand the income tax base, "rationalize" pension costs, continue labor market reform to increase labor mobility, as well as simplify the procedure for employees’ dismissal. Athens considered these requirements too harsh. The current negotiations’ main stumbling block was reduction of benefits, which have already been cut by 40% since 2011. After all, the new cuts were approved. There will be additional 18% from 2019 to save 2% of the country's GDP.

The news caused rate on short-term government bonds of Greece to fall by 60 basis points, to 5.89%, and by 10-year - by 42 points, to 6.06%, the lowest since autumn 2014.

Recall that the total amount of the program of assistance to Greece expiring in 2018 is € 86 billion. Due to refusal of the European creditors, primarily Germany, to cancel or restructure part of the debt in 2015, the IMF refused to participate in the program. Condition for the writing off was achievement of a stable primary budget surplus of 3.5% of GDP. The IMF, in turn, considers the write-off as a prerequisite so that the debt structure can be recognized as sustainable. To date, the aggregate amount of Greece's debt is about 180% of GDP, and the unemployment rate has approached 25%. 

Greece will have to start repaying debts to its eurocreditors no earlier than 2023. Therefore, experts say that the main goal of the restructuring will be to increase investor confidence in the country's long-term economic prospects. It can also raise the ratings of the Alexis Tsipras’ government, which, according to recent polls, is inferior to the opposition’s popularity. Above that, the agreement has been accelerated thanks to prospects for the victory of the right forces in the upcoming elections in France, Britain and Germany, which would have made the negotiations much more difficult.