Photographer: Chris Ratcliffe/Bloomberg

It’s Bailout-Review Time in Greece and Markets Are Wary—Again

  • Crunch time for Greece as review tests bailout-exit capability
  • IMF demands on Greek banks, debt relief among review issues

The moment of reckoning may soon be upon Greece.

As the country enters the final year of its bailout, questions remain on whether it will be able to stand on its own feet when the rescue program ends. In the immediate term, with creditor representatives descending upon Athens last week for the third review, other concerns loom large: Will this review of the bailout program be different from the previous two? What role will the International Monetary Fund play? Will Greece complete the 95 measures in the review in time?

“The government appears willing to proceed with the third review without the delays of the past,” said Nikos Vettas, General Director of the Foundation of Economic and Industrial Research in Athens, who says that the Greek economy “is on a mild recovery path, assisted by a good year in tourism and other such increases in external demand.”

Markets are less sanguine. The review officially starts mid-October and Prime Minister Alexis Tsipras said Monday that Greece aims to complete the necessary economic overhaul by November. Still, concern that this review, like the last two, will drag on until the end of the program in August has triggered a new cycle of market jitters. Last week was the worst since June 2016 for Greek stocks. The ASE Index was trading 2.7 percent lower at 2.02pm local time.

“The market is running low on catalysts and the advent of the third bailout review has rekindled reflexes of uncertainty, particularly in equities,” said Thanassis Drogossis, the Athens-based head of institutional equities at Pantelakis Securities SA.

Greece faces two possible outcomes. Officials from both the government and creditors say the aim is to finish the third bailout review by the end of the year, giving the country time to raise more funds in the market and paving the way for its successful program exit. Concluding the review by the end of the year, or even in the early months of next year, would help Greece gain much-needed investor confidence.

Prolonged negotiations, on the other hand, could weigh on investor sentiment and hamper the country’s effort to exit its bailout next summer and finance itself. 

No Debt Relief

“Investments are at a very low level and, as a result, Greece is growing much slower than it should and, in fact, slower than many of its eurozone partners,” Vettas said. Greek investment was stagnant in 2016 and fell during the first two quarters of this year.

If Greece’s bailout runs out before the country completes all the reforms it has agreed to, it could put at risk any plans for debt relief from the euro area, something the government has sought for years. Greece’s partners agreed to ease the country’s debt at the end of its bailout, provided agreed reforms are successfully concluded. 

Key sticking points in the review include Greece’s budget for 2018, and whether the country is taking sufficient measures to hit bailout-prescribed targets. Greece is expected to have a primary surplus, which excludes interest payments, of 3.5 percent of gross domestic product next year, a target that seems more difficult as tax receipts have failed to yield expected revenue, Greek and EU officials say.

Tough Choices

Meanwhile, politically contentious issues such as privatizations, the reform of public administration as well as an overhaul of the labor market may be raised in the upcoming talks. Greek banks’ handling of nonperforming loans is also expected to come under fire as is a restructuring of social benefits. Tsipras’s administration has yet to find resources in the budget to avoid cutting some popular benefits.

The IMF’s demand for a new asset-quality review for Greek banks may be another bone of contention, this time between the Fund and the European Central Bank. The Greek government and Frankfurt say that such a review will harm the nation’s lenders because they need to focus on addressing the NPL issue.

A solution, they say, may be to wait for the results of the banks’ regular stress tests, which are expected before the end of the bailout program, without a new asset-quality review.

Some external factors may also have major consequences for the discussions, most importantly the German election.

Crucial Elections

Whether the new German government insists on the immediate participation of the IMF in the bailout could affect both discussions on the reforms the country must undertake and the debt relief it could eventually be granted.

The IMF has agreed on extending new loans to Greece in principle, but its participation in the bailout remains contingent on the euro area restructuring the country’s debt more than what it has so far been willing to. This means that if the fund is to come on board and actually give out bailout cash to Athens, the euro area must move beyond what it has said it will do to ease Greece’s debt load, something many countries, including Germany, have so far vehemently opposed.

What is within Greece’s control is to ensure that the review goes down as well as it possibly can, a Greek official said.

Greece’s aim is to close the majority of issues in November so that the third review can be completed as soon as possible, Government Spokesman Dimitris Tzanakopoulos said on Wednesday. Earlier, European Commission Vice President Valdis Dombrovskis said that “I would not put banking sector issues currently as more pressing issues in the context of the third review,” but added it’s important that Greece meets the 3.5 percent of GDP primary surplus target for 2018.

“From today’s juncture, two ingredients are needed,” Vettas said. “Avoiding any actions that would increase the risk of the program being derailed and insisting on reforms that will reduce bureaucracy in the public sector and attract new investment.”

— With assistance by Vassilis Karamanis, and Paul Tugwell

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