by The deal should help Greek banks and bonds, but major questions on Greek debt relief were postponed and Greece’s economy remains in the doldrums Read full report here In the early hours of May 25, the Eurogroup, made up of euro area finance ministers, reached an agreement on Greece. The agreement will see the disbursement of the second tranche of loans (EUR 10.3bn) as part of Greece’s third bailout programme. In addition, a road map was drawn up that opens the way to debt relief after the bailout programme ends in 2018, conditional on its successful implementation. Although some hurdles remain, the Eurogroup thus managed to halt their wrangling over Greece ahead of next month’s UK referendum on continued membership of the European Union and fresh legislative elections in Spain. The terms remain vague regarding eventual debt relief and there were no precise details on the size of the measures or quantification of its effect on Greek financing needs and debt. But the May 25 agreement contains the firmest pledge yet to debt relief and at least some measures were agreed to improve the sustainability of Greek debt. By agreeing provisionally to continue its involvement in Greece’s bailout programme, the IMF has made a major concession, given its previous statements.
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Nadia Gharbi considers the following as important: Greek bailout, Greek debt, Greek debt relief, Macroview
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The deal should help Greek banks and bonds, but major questions on Greek debt relief were postponed and Greece’s economy remains in the doldrums
In the early hours of May 25, the Eurogroup, made up of euro area finance ministers, reached an agreement on Greece. The agreement will see the disbursement of the second tranche of loans (EUR 10.3bn) as part of Greece’s third bailout programme. In addition, a road map was drawn up that opens the way to debt relief after the bailout programme ends in 2018, conditional on its successful implementation. Although some hurdles remain, the Eurogroup thus managed to halt their wrangling over Greece ahead of next month’s UK referendum on continued membership of the European Union and fresh legislative elections in Spain.
The terms remain vague regarding eventual debt relief and there were no precise details on the size of the measures or quantification of its effect on Greek financing needs and debt. But the May 25 agreement contains the firmest pledge yet to debt relief and at least some measures were agreed to improve the sustainability of Greek debt.
By agreeing provisionally to continue its involvement in Greece’s bailout programme, the IMF has made a major concession, given its previous statements. Nevertheless, the IMF has said it will have to carry out another analysis of the Greek economy before it will give a definitive yes to further participation in the bailout.
The Eurogroup agreement is likely to be positive for Greek banks and bonds. Indeed, completion of the first bailout programme review should allow the ECB to issue a waiver for Greek government bonds in the near future. This will allow Greek banks to regain access to the ECB’s main funding facility and thus cut their funding costs (by at least 100 basis points) compared with the Emergency liquidity assistance (ELA) on which they are currently reliant. Moreover, the ECB is likely to include Greek government bonds in its QE programme, which would drive down Greek government bond yields.
But the economic outlook for Greece remains bleak. Latest growth data (-0.4% q-o-q in Q1) were disappointing and the unemployment rate (24%) is still at a record high. The Greek economy managed to achieve a small primary surplus in 2015 (0.8% of GDP) but this was mainly due to one-off factors. In our view, it will be hard for Greece to run a sustainable primary surplus of 3.5% in 2018, as its European creditors are demanding.