Greece Politics


Greece: Government and international lenders reach an agreement

March 26, 2014

On 30 March, the Greek Parliament passed a multi-bill containing liberalization reforms, which had been agreed upon with the representatives of the troika-the International Monetary Fund (IMF), European Commission (EC) and European Central Bank (ECB). The approval of the bill paves the way for the disbursement of a tranche of approximately EUR 11 billion in funds-part of the second bailout package-as agreed with the troika on 18 March when the latest marathon session of talks between the two parts ended. European Union finance ministers will discuss the disbursement of funds when they meet in April and the IMF will discuss the topic at a meeting in May. Talks became easier when creditors were able to verify that Greece had actually met its ambitious EUR 812 million (0.4% of GDP) primary surplus goal for 2013. A crucial point of disagreement that remains is the size of the 2014 primary surplus and what should be done with it. For this year, the government projects a surplus of EUR 2.9 billion. Prime Minister Antonis Samaras has already pledged to redistribute part of the projected surplus in handouts, mainly to low-income pensioners, military personnel and police officers. However, this will only happen if Eurostat confirms the government's surplus estimates when it releases budget figures for the Euro area in April. In addition, the two parts agreed to reduce the social security contributions that employers pay by 3.9%, which will help struggling businesses. The troika highlighted banks' capital needs as an issue that the government must watch closely. The international lenders are still skeptical about the EUR 6.4 billion figure of extra capital the banks require, which was presented by the Bank of Greece (BoG). Since the two parties compromised to proceed on the basis of the BoG numbers, the government agreed that the remainder of the approximately EUR 11 billion rescue loan-after covering for expiring bonds-will be allocated to any further extra capital need the ECB identifies after it conducts its own stress test later this year. The troika's 5th review started in September 2013 and was prolonged due to disagreements regarding the extent of the austerity measures the Greek government would have to implement in order to secure the rescue loans. To date Greece has received EUR 110 billion in loans from its first support package and the country is entitled of another EUR 130 billion in loans (77.0% of which has already been disbursed) until 2016 under its second bailout program. However, following the news of the agreement, prices on the Athens stock exchange rose to a three-year high and the 10-year-bond spreads narrowed amid expectations that the Greek government will return to the markets earlier than expected. As a result, Greece may avoid a third bailout by regaining full access to the markets. In light of these developments, Theodoros Stamatiou, economist at Eurobank, says that: The conclusion of the current review together with the achievement of a significant positive primary surplus (official verification by Eurostat at the end of April) will permit the beginning of the negotiations for the implementation of additional debt relief measures [...]. We do not expect a direct haircut. An indirect method, including the extension

Author:, Senior Economist

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