Greece and its institutional lenders are pulling the stops out to reach political agreement at the Eurogroup meeting on Monday 22 May that would finalise the second monitoring mission for the third Greek bailout of €86 billion from the European Stability Mechanism (ESM).
No fewer than 140 prior actions to be applied have been identified and agreed upon at technical level (see EUROPE 11779). Eighty of them will require parliamentary approval before the Eurogroup meeting and the Greek authorities are drawing up draft legislation to be passed in the middle of next week.
The budget target set for Greece is to achieve a primary budget surplus (not including debt servicing) of 3.5% of GDP by 2018, a percentage that the Greek government has in fact already met. Agreement already exists between Athens and the 'institutions' (European Commission, ECB, IMF and ESM) on maintaining this objective for three years after the end of the current aid plan, i.e. until 2021.
In order to meet such a commitment, the Greek government has agreed to legislate immediately in order to reduce pensions by 1% of GDP from 2019 and to enlarge the income on which individuals must pay tax by 1% of GDP from 2020 onwards. Other budget consolidation measures include the formal creation of an independent tax-collecting body, the phasing out of EKAS solidarity payments to pensioners by 2020, rationalising healthcare spending and later liberalisation of network industries (energy, water and transport), according to a draft agreement published on Monday 8 May by German business newspaper Handelsblatt.
If Greece’s budget performance exceeds 3.5% of GDP as a primary surplus after 2018 as Europe says it will, then social measures or measures to stimulate the economy can be applied.
The Tsipras government is considering housing aid, increasing child benefits, extending free pre-school childcare, a gradual contribution to pharmaceutical costs depending on income, reducing corporation tax from 29% to 26% and income tax from 22% to 20%), according to a Greek document seen by this newsletter.
If Athens achieves all the prior actions required of it, it may benefit from a new burst of aid from the ESM in order to honour its financial commitments (repaying a €7 billion loan to the ECB) and pay off its payment arrears to the Greek economy.
Focus on medium-term debt-easing measures
The head of Eurogroup, Jeroen Dijsselbloem, has said a number of times that the second monitoring mission should include discussion about medium-term debt-easing measures based on the statement by eurozone finance ministers of May 2016 (see EUROPE 11557).
The Greek public debt grew again from 2015 to 2016, from 177.4% to 179% of GDP.
Backed by the IMF, the Greek authorities have been insistently demanding such a measure. The Greek prime minister, Alexis Tsipras, says that no budget consolidation measures will be applied until there is a further easing of the Greek debt (which will not take the form of a writedown of Greek bonds).
Under the Eurogroup statement of May 2016, later easing of the Greek debt (after the one agreed at the end of 2016 (see EUROPE 11682)), will be applied in 2018 if the lenders feel that the debt is not viable. An indicator decided upon is gross annual financing needs for debt-financing, which must not exceed 15% in the medium-term and 20% in the long-term.
The eurozone finance ministers say three types of measure are possible: scrapping the measure that increases the interest rate on some types of debt if Athens does not repay enough to its lenders through privatisation; - returning to Greece profits made by central banks and the ECB on Greek bonds held under the SMP bond mass purchase scheme; using unused sums from the ESM to make early payments on existing loans in order to reduce interest rates and extend maturities. On the latter point, Handelsblatt says that the ESM could buy €13 billion of loans granted by the IMF under previous bailouts.
At the end of May, the Eurogroup may restate its political commitment to make a new easing of the Greek debt in the medium-term if necessary, but it may postpone finalisation of these measures, or at least any final decision until some time after the German general elections scheduled for September.
This sequence was confirmed to this newsletter by the Greek European affairs minister, George Katrougalos, last week in Florence on the fringes of the annual conference on the state of the Union at the European University Institute.
The tone of language used by the eurozone when talking about lenders easing the Greek debt burden will have to be convincing enough to get the IMF to financially support the third Greek bailout.
On this basis, Athens hopes to be able to benefit from the ECB’s quantitive easing, for which the ECB must first deem the Greek programme to be on track. Benefiting from QE would help keep down interest rates on the Greek debt and would hugely facilitate Greece’s return to the medium and long-term debt market.
On Wednesday, the European Commission will discuss the current negotiations between Athens and its lenders. In its spring economic forecasts it is due to publish for the eurozone, it will cut wealth creation forecasts for 2017 from 2.7% to 2.0% of GDP, pointing at the uncertainty generated by the delays in terminating the negotiations. On Wednesday 17 May, the European Commission may recommend putting an end to the excessive debt proceedings against Greece following the budget surplus of 0.7% of GDP in 2016 after the deficit of 5.9% in 2015. (Original version in French by Mathieu Bion)