Greece Wins Pledge for Debt Relief as IMF Bows to Euro Plan

Greece to Receive Multi Billion Euro Payout
  • IMF makes ‘major concession’ in Eurogroup negotiations
  • First aid payment to be made in June to cover debt servicing

Greece’s creditors reached a preliminary accord to ease the country’s debt burden but left the important details to be hammered out after Germany’s federal election next year.

QuickTake Greece’s Financial Odyssey

At a meeting of euro-area finance ministers in Brussels that ended early Wednesday, and paved the way for a 10.3 billion-euro ($11.5 billion) aid payout, the International Monetary Fund retreated from its hard-line stance for concrete and generous measures on Greece’s debt, allowing creditors to announce a “breakthrough” despite giving no figures or real commitments.

Euclid Tsakalotos leaves the Eurogroup meeting in Brussels.
Euclid Tsakalotos leaves the Eurogroup meeting in Brussels.
Photographer: Jasper Juinen/Bloomberg

"It seems very much like an agreement of convenience more than anything else,” Peter Rosenstreich, head of market strategy at Swissquote Bank told Bloomberg TV. “Greece needed the money now -- they were already behind on payments. Europe really needed to show a stable hand” before the June 23 referendum on whether the U.K. should stay in the European Union, he said.

After the 11-hour gathering, the ministers agreed to release the much-delayed aid payout and set a path toward debt relief after the Washington-based IMF yielded its stance and allowed an accord to be reached. Some euro-area nations including Germany and the Netherlands had resisted the restructuring measures as they are restrained by domestic electorates that have grown weary of helping the Greeks.

“We on the part of the IMF have made a major concession -- and I might as well be open about that -- we had argued that these debt-relief measures should be approved up front and we have agreed that they will be approved at the end of the program,” said the IMF’s European Department Director Poul Thomsen. “We all showed flexibility.”

Jeroen Dijsselbloem.
Jeroen Dijsselbloem.
Photographer: Jasper Juinen/Bloomberg

Thomsen said the IMF would participate financially in the Greek program later this year, satisfying Germany which has persistently demanded the fund’s involvement since the bailout was agreed last summer.

The yield on Greece’s 10-year bond fell below 7 percent for the first time since November, sinking as low as 6.98 percent on Wednesday. The yield subsequently rose to 7.15 percent at 1:18 p.m. in Athens.

The accord means that significant debt relief for Greece won’t be considered until mid-2018, when the bailout program ends, a concession from the IMF that wanted immediate action. Options include reducing interest rates, extending loan maturities, easing repayment profiles and returning profits to Greece from the European Central Bank’s Securities Market Program.

Greek Recovery

Despite the agreement, there’s no guarantee that the IMF will join the Greek program, said Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting. The fund has its “own rules and procedures to follow so later this year they will make a new debt-sustainability analysis and assess the debt measures we have put on the table and they will come to their opinion,” he said.

As part of the short-term debt relief measures that would kick in before 2018, the European Stability Mechanism, the euro-area’s crisis-fighting fund, will seek to reduce interest-rate risk without incurring additional costs.

“The EU put again temporal political considerations above the long terms interests,” Nicholas Economides, professor of economics at Stern School of Business, New York University, said by e-mail. “There is a real danger that, by the time decisions on Greek debt are made in 2018, interest rates would have risen sharply, eliminating any chance of eventual recovery for Greece.”

The aid disbursal will include a 7.5 billion-euro portion that will be released in June to cover debt-servicing needs and to clear initial arrears, according to a statement. The remainder of the payout will be made after the summer.

‘Important Moment’

Dijsselbloem said he couldn’t have imagined this agreement taking place just a month ago. “The ministers have stretched their political capital to put this on the table,” he said.

With Greek Prime Minister Alexis Tsipras accommodating demands for extra austerity and Europe keen not to fuel euroskepticism in the U.K. before its referendum, the finance ministers lined up behind a package that avoids a repeat of last summer’s drama in which Greece was pushed to the brink of a euro exit.

The euro area agreed to benchmark its debt analysis on Greece’s ability to cover its costs and as a baseline scenario wants gross financing needs to remain below 15 percent of gross domestic product in the medium term and below 20 percent after that, according to the statement. The Eurogroup also seeks a medium-term primary budget surplus of 3.5 percent of GDP, a level the IMF had previously said Greece wouldn’t be able to sustain.

The deal paves the way for Greek banks to access regular financing lines at the ECB as early as next week, allowing them to stop relying on expensive short-term emergency funding that lenders have been using since February 2015. Completion of the bailout review was also a condition for the inclusion of Greek government securities in the ECB’s bond-buying program.

The accord is an “important moment” for Greece and may pave the way for the nation to end its cycle of recession and austerity, Greek Finance Minister Euclid Tsakalotos said.

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