Greece: Debt relief clinched as bailout exit nears
After years of tough negotiations and reliance on creditors, Greece is set for a clean exit from its bailout program in August, after completing the fourth and final review of its third bailout and striking a crucial debt relief agreement with its creditors on 22 June. The agreement lessens Greece’s debt burden notably in the medium-term and should enable the country to return to financial markets for its financing needs. In addition, a final disbursement of EUR 15.0 billion in loans was greenlighted to shore up the country’s cash reserves and keep it financed for around 22 months following the end of the program. All-in-all, Greece is set for a smooth exit from its bailout in August, and debt-related risks have decreased notably in the medium-term, boding well for the economic outlook. That said, the agreement was devoid of ambitious debt relief measures, and some doubt remains over the long-term sustainability of the country’s load.
The details of the debt relief agreement include an upfront 10-year extension in the maturities of around EUR 100 billion worth of loans from its European Financial Stability Facility (EFSF), along with a deferral of the interest payments. These measures will significantly reduce the country’s debt repayments in the next decade, likely bringing them to a sustainable level for now. In addition, the country will receive biannual payments from the ECB on the profits made on Greek bonds until 2022, conditional on economic reforms. Overall, the country’s creditors will still maintain a tight leash on Greece, conducting quarterly reviews and subjecting some debt relief measures to continued progress on economic reforms and hitting ambitious fiscal targets. The Greek government has committed to keeping the primary surplus at 3.5% of GDP until 2022, and the European Commission stated that the primary surplus should average 2.2% of GDP from 2023 to 2060.
While a solid cash buffer and the deferral of some payments should set Greece up for smooth sailing in the coming years, questions over the sustainability of its debt load, especially at the end of the EFSF grace period in 2032, still linger, even though the Eurogroup has pledged to review if additional measures are needed at this crossroad. In addition, an austerity-weary population could interfere with the government’s ability to continue pursuing unpopular reforms or meet tough fiscal targets, despite the incentives to do so contained in the debt relief agreement. Commenting on the agreement, Senior Economist Paolo Pizzoli at ING adds:
“The agreement on the completion of the Greek programme is certainly good news. To be sure, it does not bring a once-and-for-all solution to the Greek debt problem. But it should ensure an effective hedge against the resurgence of Greek risk for a number of years. […] Fiscal targets remain ambitious, and the Greek commitment to keep the primary surplus at 3.5% of GDP until 2022, and, most notably, at 2.2% of GDP from 2023 to 2060, looks liable to future downward revisions.”