Greek Debt-Relief Talks Move Closer After Late-Night Deal

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  • Agreement includes pension cuts, lower tax-free threshold
  • Primary surplus targets will be discussed in Eurogroup meeting

Greece resolved the latest impasse over the terms of its bailout program with international creditors in the early hours of Tuesday, unlocking the way for debt-relief talks and the disbursement of the next tranche of emergency loans.

Greeks stocks and bonds rallied after the breakthrough that ends months of negotiations with the euro area and the International Monetary Fund. The Greek government yielded to a number of demands including pension cuts and a lower tax-free threshold of around 5,700 euros ($6,228) to 6,000 euros from 8,636 euros now. The agreement will also allow more shops to open on Sundays in various parts of the country.

“Swift implementation of these commitments should enable the Eurogroup to endorse this agreement at its next meeting,” European Commissioner for Economic Affairs Pierre Moscovici said in an emailed statement on Tuesday.

Seven years after Greece applied for outside aid, triggering a debt crisis that rippled across the euro area, the country remains heavily indebted and in need of bailout loans. In the latest standoff, Greece needs an installment of about 7 billion euros in aid to repay lenders in a few months, yet some euro-area governments, notably Germany, refuse to pay out until the IMF comes on board. The IMF has said it won’t join the latest bailout program until Greece’s debt burden is eased, in addition to the reforms agreed to earlier Tuesday.

“The discussion for an agreement that secures Greek debt’s sustainability now begins,” Greek Finance Minister Euclid Tsakalotos told reporters in Athens after the meeting with bailout auditors, which yielded the breakthrough.

A senior IMF official welcomed the agreement, saying it will allow Greek fiscal policy to “become much more growth friendly.” However, the fund will need to reassure its board of directors that there’s a “common understanding with our European partners on what kind of measures will be needed to deliver” the debt relief Greece requires, said the IMF’s European Department chief Poul Thomsen.

The IMF requires “strong policies and strong debt relief” before it can ask the board to approve a new loan, he said.

Staying Afloat

The set of measures now agreed to “should allow Greece to receive the funds it needs to stay afloat over the summer,” said Holger Schmieding, chief economist at Berenberg Bank. “Both Greece and its creditors are de facto buying time before talks, including those on the details of debt relief.”

If Greece beats its targets, the government will be able to implement a number of offsetting measures to ease the austerity burden, according to an official in Prime Minister Alexis Tsipras’s government who asked not to named discussing the program. They include subsidies for rent of as much as 1,000 euros per year, as much as 250 million euros in child support and lower contributions to medication for those of lower income. Collective bargaining for Greek employees will be reinstated starting September 2018, the official said.

Leaving Athens

Creditor officials will craft the compliance report which will allow euro-area finance ministers to approve Greece’s next loan tranche at a May 22 Eurogroup meeting, with the actual disbursement expected to take place by the first half of June. A euro-working group is due to take place on May 4 on top of scheduled one on May 15, while Greek lawmakers are due to vote on the agreed measures by May 18, said a person familiar with the talks, who spoke on condition of anonymity. A discussion on Greece’s debt will also take place on the sidelines of a G7 finance ministers’ meeting in Bari, Italy, May 11 to May 13, the person said.

Discussions on Greece’s primary-surplus targets for the years after the end of the program in 2018 are linked to negotiations about the sustainability of the country’s debt, Tsakalotos said. These talks will now be held at finance minister level, he said.

The preliminary agreement “will now be complemented by further discussions in the coming weeks on a credible strategy for ensuring that Greece’s debt is sustainable,” the European Stability Mechanism said in an emailed statement.

Greek lawmakers will have to vote on the package before the ministers’ meeting, with the government aiming to have both the offsetting measures and those required by the bailout voted on in the first half of May.

— With assistance by Viktoria Dendrinou, Nikos Chrysoloras, and Andrew Mayeda

(Updates with quote from IMF’s Thomsen from sixth paragraph.)
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