Greece: Greece eyes precautionary credit line as “clean” exit plan backfires
October 27, 2014
The Greek government’s plan to exit the IMF leg of its ongoing EUR 240 billion bailout loan over a year earlier than expected suffered a serious setback in mid-October. Skepticism over whether Greece would be able to sustain itself financially without help from international lenders prompted a sell-out of Greek bonds, bringing the yield on government securities to levels not seen since mid-2013. Rather than dropping financial assistance altogether, Greece now seems likely to seek post-bailout assistance from its European partners. The recent developments come amid political uncertainty fueled by concerns that early elections may be held at the beginning of 2015. Survival of Prime Minister Antonis Samaras’ government largely depends upon its ability to negotiate a painless exit from the bailout program.
On 10 October, the Samaras-led government won a confidence vote in the Greek Parliament. Samaras had called the vote to get backing for his plan to forgo the remaining tranches of the IMF loan planned for 2015 and 2016, with the aim of reducing oversight by international lenders and avoiding further painful and unpopular austerity measures. The markets reacted negatively amid strong skepticism that Greece would not be able to sustain itself financially without assistance from the IMF next year, as the part of the loan from the European Central Bank-European Commission (ECB-EC) expires this year. In the days following the vote, yields on Greek bonds skyrocketed to levels not seen since the height of the Greek debt crisis—making the possibility even more remote that Greece could sell bonds to meet its EUR 15 billion financing gap for next year.
The Greek government was forced to backtrack from its earlier plan, thus easing the pressure on government bonds. On 23 October, Prime Minister Samaras admitted that, if Greece were to drop the IMF loan, it would need to apply to some sort of precautionary financial assistance from European partners. Against this backdrop, Greek authorities are currently negotiating a precautionary credit line with international lenders that would be available if raising borrowing costs complicates access to bond markets next year; the credit line would not be attached to strict controls as the bailout loan is. Greece still needs to complete the last review of the ECB-EC leg of the bailout loan, which the government hopes to have completed by 8 December. Disagreements persist between the troika and Greek authorities regarding the extent to which Greece has actually met its bailout commitments. A particular item of contention is the reform of the pension system; the troika expects further progress on the reform before returning to Athens on 4 November to continue negotiations.
The scenario is fraught with political uncertainty amid the threat of snap elections. With his push to make a “clean” exit from the bailout, Samaras was trying to woo support from opposition lawmakers for his presidential candidacy in February 2015. Samaras needs support from 180 members of parliament—the New Democracy (ND)-Socialist Party (PASOK) holds a slim majority in the 300-seat parliament with 155 seats. Failure to reach an agreement on the candidate supported by the governing coalition would, according to Greek law, trigger snap elections. The most recent opinion polls show anti-bailout radical left opposition party SYRIZA as the likely winner—a prospect that has contributed to investors’ concerns in recent weeks.
Author: Cecilia Simkievich, Economist