Greece Said to Expect Revised Bailout Draft as Talks Resume

Greece’s auditors are pulling together a list of policies the country needs to implement to unlock additional bailout funds as talks with Athens resumed on Tuesday, two people familiar with the matter said.

Greece has asked European lenders for a draft Supplemental Memorandum of Understanding and the International Monetary Fund for a Memorandum of Economic and Financial Policies as it braces for details of creditor demands, the people said, declining to be identified as negotiations between the two sides aren’t public. The government expects an accord in March or early April, but the scale of pending issues raises concerns they may be politically hard to sell at home, they said.

“Delays are likely to continue until funding pressures start materializing further down the line,” Merrill Lynch International analysts including Athanasios Vamvakidis wrote in a note to clients on Monday. “Risks remain high.”

Greek Prime Minister Alexis Tsipras’s government last Monday agreed to legislate structural reforms demanded by the IMF that will lower the threshold of tax-free income and amend the pension system by 2019, effectively crossing what it had once characterized as a red line. The government says the deal won’t increase austerity since the new legislation will include stimulus measures in addition to belt-tightening reforms.

Tsipras told lawmakers on Friday that the bailout review can be completed by March 20 when euro–area finance ministers are set to meet in Brussels. It could drag on to the next Eurogroup meeting on April 7th given the number of outstanding issues that need to be resolved, the people said. Greece is looking for a “global deal” that would also include potential decisions on medium-term debt-relief measures and the inclusion of Greek bonds in the European Central Bank’s debt-purchase program.

“We don’t know when we will have a global agreement on all pending issues, including medium-term debt relief measures,” Greek Finance Minister Euclid Tsakalotos told lawmakers in Athens on Tuesday, adding that the government is targeting a provisional agreement with its creditors in the next Eurogroup meeting.

Greek bonds fell on Tuesday, with yields on 10-year notes rising 5 basis points to 7.18 percent at 5 p.m local time in Athens. The Athens Stock Exchange General Index fell less than 0.1 percent.

More Measures

The auditors’ proposal would elaborate on the measures creditors demanded from Greek Finance Minister Euclid Tsakalotos in a crisis meeting in Brussels on Feb. 10.

After the two sides reach a so-called staff-level-agreement on what needs to be done, the euro-area’s finance ministers will discuss additional debt relief options, which are being demanded by the IMF as a condition to participate in the Greek bailout. The Washington-based fund is likely to ask for a more concrete description of the “medium-term” instruments that will be adopted after 2018 to ensure that Greece’s obligations return to a sustainable path.

“More progress will be needed to bridge differences on other important issues, and it is too early to speculate about the prospect for reaching staff-level agreement during this mission,” the IMF said last week.

Greece is being asked to implement ambitious fiscal, labor and energy reforms. Negotiations could lead to a quick agreement if there’s political will in Athens and a realistic approach from lenders, one of the people said. If not, the auditors’ mission would probably be short and another round of meetings will be required to reach an accord.

Populist Measures

Creditors have asked new austerity measures of as much as 2 percent of gross domestic product, which will be put in place by 2019 if Greece misses its budget targets. Athens believes that this number could fall to between 1.7 percent and 1.8 percent because of an improved budget performance in 2016 and its carry-over effect for the coming years.

Bailout institutions have asked that the measures come from a further cut in the income-tax-free threshold equal to 0.75 percent of GDP, another 0.75 percent of GDP decrease in pensions and 0.5 percent from other unidentified policies. All these measures need to be pre-legislated. Parliament will vote them now and they will be effective from January 1st, 2019.

At the same time, the Greek government will have to agree with creditors on the offsetting measures that will be triggered if it beats its budget targets. Athens expects that the creditors will demand that these policies be focused on tax cuts for companies and cuts in social contributions. The government plans to push for some more populist measures.

Contentious Points

Greece also has to close a projected fiscal gap for 2018 as creditors doubt it will meet an agreed target for a budget surplus before interest payments equal to 3.5 percent of GDP. The government has identified extra measures of 500 million euros out of 700 million euros ($741 million) of the estimated gap identified by European auditors. Athens says it can raise the remaining 200 million euros, thanks to the better-than-expected budget performance in 2016.

Labor market reforms is another minefield for the negotiations. The government wants to reinstate an earlier collective bargaining framework, while auditors have made clear they don’t want Greece backtracking on labor market deregulation. On collective dismissals, the lenders are more flexible and may not ask the government to double the mass dismissals threshold to 10 percent, the people said. This would be the case only if government changes the legal framework to make it easier for companies to fire employees.

In the energy market the government and auditors disagree on the way electric power auctions work. Another sticking point is the out-of-court debt settlement framework for bad loans, which is under public consultation. Discussions are still under way on which exceptions to include and what the debt-haircut level must be. There are also other less important issues still pending for the bailout review to be completed, like store openings on Sundays, which the government opposes.

“We are confident that solutions can be found, as has always been the case, to conclude the review and ensure continuing progress and reform implementation in the Greek program,” European Commission spokesman Margaritis Schinas told reporters in Brussels on Monday.