The Eurogroup met in Luxembourg on Thursday for what turned out to be a long night of negotiations over a debt relief plan for Greece. With Greece’s last financial assistance programme set to end on August 20th, the stakes were high for the Eurozone’s finance ministers to strike a deal that would facilitate a smooth transition for Greece’s economy. In the end, expectations were exceeded with an agreement that will provide Greece with a sizeable cash buffer and extend the maturity on its loans.
The lead up to this agreement began in 2009 when Greece announced that it faced a 12.9% budget deficit. Under EU law, member states’ budget deficits must remain under 3%. Greece’s funding gap undermined market confidence, resulting in a decline in the country’s credit rating and a precipitous rise in its borrowing costs. In order to avoid an official sovereign default, the EU provided loans tied to the introduction of reforms through the European Financial Stability Facility (EFSF) and its replacement institution, the European Stability Mechanism (ESM). These loans, which total €241.6 billion, were dispersed in tranches through three financial assistance programmes between 2010 and 2018.
Doubts have been expressed over the sustainability of Greece’s debt load, which stands at nearly 180% of GDP. Once the country leaves the bailout programme, it will need to return to the market in order to raise money to service its debt. However, without an easing of debt repayment conditions, it’s unlikely that Greece would be able to meet its hefty obligations, which would scare off investors from buying Greek government bonds and could result in a domino effect of repeated financial instability.
Thus, the gravity of the Eurogroup’s task yesterday was large, and its importance was highlighted by EU Economics Commissioner, Pierre Moscovici. Heading into the meeting, he stated that in order to “find a deal today and conclude the Greek programme, we need to have a credible package for debt measures that is strong enough to alleviate the debt burden for Greece and to reassure markets.”
Will the agreement achieve this goal? All signs point to yes. Firstly, the Eurogroup decided not to increase interest rates associated with the debt buy-back of Greece’s second tranche of loans. As well, Greece will now have an additional 10 years to pay back 40% of its loans, as the deadline was extended from 2023 to 2033. This latter point is a welcome decision given that the Eurogroup had previously stated it was considering scenarios that included an extension as long as 15 years or no extension at all.
Furthermore, Greece has been provided with a considerable cash buffer. Germany surprised some observers by agreeing to increase the size of Greece’s final tranche of financial assistance from €11.7 billion to €24.1 billion. This will provide Greece with enough cash to cover its costs for 22 months. Additionally, profits made from the EU’s securities and markets programme (SMP) on Greek bonds will be transferred on a semi-annual basis to Greece until June 2022. These two decisions should help reduce the country’s large financing needs.
Looking forward, there are several reasons to remain optimistic about the country’s economic resurgence. Greek Finance Minister Euclid Tsakalotos stated after the meeting that the government is happy with the deal. So far, the country has passed no fewer than 15 reforms in areas related to pensions, taxation, public administration, privatisation, the financial sector and the labour market. With this most recent agreement, the government has made further commitments, including the maintenance of a primary surplus of 3.5% of GDP until 2022, establishing a single pension fund by mid-2020, enacting judicial reforms to tackle non-performing loans, completing its investment licensing reform, and the continued implementation of its privatisation plans.
The Eurogroup has also outlined the conditions for the Post-Programme Surveillance Framework. This programme is meant to ensure that countries are enacting policies that will enable them to repay their loans after they have exited a bailout programme. While reviews typically take place twice a year, Greece has agreed to “enhanced surveillance”, which will involve quarterly audits of its economic, fiscal, and financial situation. Additionally, the Eurogroup will review whether additional debt measures are needed in 2032 to ensure that Greece’s gross financing needs are kept within 15% of GDP in the medium-term and below 20% of GDP over the long-term. These two initiatives should be sufficient to inspire increased market confidence in the country’s economic revival.
“I think this is the end of the Greek crisis. I think Greece is turning a page. I think it has all the building blocks there to leave the programme with confidence that we can access the markets and we can implement our growth strategy and turn the agenda away from one of fiscal adjustment…to one of growth,” said Greece’s finance minister. Indeed, after eight years of financial instability, it appears that Greece is well on its way down the path of sustainable economic growth.