With surprisingly little drama, Greece and its creditors appear to be heading for an agreement on a third bail-out.
Last month’s talks in Brussels had been so fraught that further obstacles had been expected as the detailed negotiations got under way to try to agree the fine print of a new programme. Last-minute blockages could yet emerge before the deal is finally signed off, but there is now a feeling that it will be done.
This would remove any immediate threat of Greek exit from the euro zone – and the turmoil this could create. But even if a deal is concluded, major problems remain in implementing it, and the vital question of possible debt relief for Greece is not going to be decided until later.
Payment deadline
Greece’s next major repayment is €3.2 billion due to the European Central Bank (ECB) on August 20th, providing a deadline for a new bailout to be sorted. There had been speculation of some interim finance being extended if the talks were not over, but this should not now be needed.
The Greek parliament could vote on the deal this week, with euro zone finance ministers then discussing it at a scheduled meeting on Friday, giving time for several countries’ parliaments to approve it before the August 20th payment deadline.
Reports suggest Germany wanted to push Greece for more concessions and is somewhat uneasy with the pace at which it is all happening. It will at a minimum insist that the disbursement of loans to Greece is tied strictly to delivery on its reform programme. The programme will focus on tax and spending measures, a privatisation programme and wider reforms – all spelled out in huge detail. Key issues are the privatisation plan, the shape of spending cuts and the vexed area of pension reform.
Huge challenge
Even if this does go to plan, actually implementing the agreement will be a huge challenge – for all sides. Greece’s debt to GDP ratio is set to rise to some 200 per cent over the next couple of years, unless the country’s debt is restructured.
Significant debt relief is needed, but will only be discussed after the start of the programme and will be tied to delivery of initial reforms by Greece. The International Monetary Fund may not sign up until debt restructuring is agreed – so there will be plenty of scope for argument in the months ahead.
The Greek banks, while open, are not functioning and are now chronically short of capital to shore up their balance sheets. They may require as much as €25 billion after stress tests in the autumn. There is speculation that some cash may be paid in up front, before the stress tests, to try to kick start the financial system, with the banks currently limping along and urgently requiring not only capital but also more ECB support.
The Greek economy is now in a downward spiral. The initial challenge of the programme is to stop this and regain some stability. Only then can the twin challenges of agreeing reform and some kind of debt relief be faced.
