On June 15th, Euro area ministers agreed €8.5bn of aid to Greece, saving it from defaulting on its debts this summer. The uncertainty surrounding the issue of whether the country could meet large bond payments due this year has ended as creditors agreed to new loans. The International Monetary Fund is also a partner in the bailout deal, offering longer-term debt relief. This is Greece’s third bailout loan agreed after a six-hour-long meeting between the Eurozone Finance ministers and the IMF in Luxembourg. Christine Lagarde, Chief of the IMF stated, “Nobody claims that this is the best solution. That would have been a final approval on debt relief so that there would be clarity. This is second best.”
The participation of the IMF was politically important for countries like Germany, particularly to strengthen the bailout’s credibility.
After the meeting, Pierre Gramegna, Luxembourg Finance Minister said “It’s a very constructive decision that will help Greece, also on the international market, to gradually get more credibility. The goal is for Greece to go back to the markets in the coming months or year”.
This deal has given relief to the Greek debt crisis and although some of the decisions are postponed, for now, a doubt for Prime Minister Alexis Tsipras raised two years ago is now clear – Greece’s membership in the single currency. Nicolas Veron, senior fellow at the Bruegel think tank said: “It cements the perception that Greece will be taken care of, that whatever happens, it won’t go to the sort of brinkmanship and real possibility of Grexit as we saw in 2015”.
According to Bloomberg, Greece has the heaviest debt burden in Europe. This questions its stability in the Union. The IMF has advocated a debt relief, however, Germany’s Wolfgang Schauble resisted making such commitments. In return, the country has been asked to widen its income tax base as well as cut pensions in order to help the IMF gain confidence in Greece achieving its budget surplus targets.
The contribution from the IMF is considered important. One obvious reason is to save it from debt default this summer. Another reason is that one of the aims of Alexis Tsipras’ party has been for the ECB to start buying Greek sovereign debt, providing confidence to international investors to return to Greece. However, when questioned after the meeting if the ECB would buy bonds, a spokesman for the central bank mentioned that the deal was “a first step towards securing debt sustainability”. Furthermore, EU officials stated that the country should not depend on participating in the central bank’s quantitative easing program as the eligibility of its bonds that can be included are only a small number.
This deal is likely to clear the uncertainty around the economic outlook of Greece, as it limits debt-financing costs to 15% of its GDP for the medium term and 20% after that. Greece has committed to maintaining a primary surplus, excluding debt interest payments, close to 2% of GDP from 2023 until 2060. In addition, creditors agreed to extend loan maturities as well as defer interest payments by 15 more years.
And what happens in the longer term? As the ministers said, “in the case of an unexpectedly more adverse scenario, a contingency mechanism on debt could be activated”. This could include a further re-profiling of loans and deferral of interest payments.
In conclusion, Greece will not default on its debt and investors are right to be relieved that a crisis has been averted. The new loans will unlock fresh bailout funds and the Greek development banks are being asked to support growth by Ministers. These steps to resolve the long economic crisis were celebrated by investors, resulting in driving Athens Stock Exchange to the highest level since June 2015, gaining as much as 1.4%. Furthermore, Greece 2-year bond yield dropped by 20 basis points to 4.78% at 10.40am on that day.