Photographer: Yorgos Karahalis/Bloomberg

All Bets Are Off for Greece Needing More Financial Support

  • Low debt-financing needs could pave the way for end to support
  • Plan depends on swift conclusion of creditors’ bailout review

With just months left before Greece’s latest lifeline expires, all bets are off on whether it’ll need more support.

Officials directly involved in the country’s bailout say they don’t have the stomach for another strings-attached aid program when the current one expires in August 2018. Worn out after seven years of endless cliffhanger negotiations, both Athens and its European creditors are keen to turn the page. That said, Greece needs to show it can go it alone while Euro-area creditors have to be sure they can recover their money.

“There’s no political appetite for another program, either in Athens or among creditors, but the Eurogroup will want to keep Greece on a leash to ensure its loans are repaid and that the government keeps reforming, so the question is what’s the best arrangement to achieve that,” said Mujtaba Rahman, managing director of Eurasia Group, a consulting firm in London.

Greece is banking on the pace of its reforms and the strength of the nation’s nascent economic recovery in the next two quarters to show creditors it can make good on its commitments. A compliance review is set to resume on Oct. 23, when auditors representing the International Monetary Fund, the European Commission, the European Central Bank and the European Stability Mechanism are scheduled to return to Athens.

Low financing obligations in the coming years and the promised additional debt relief measures by next summer may also make a clean exit easier. The debt profile and a planned cash buffer buildup should convince investors that Greece doesn’t need a credit line or new bailout loans after 2018, some officials involved in the talks said.

Not everyone is convinced. To build the buffer that will keep it afloat for at least a year after the end of its program, while also proving that it’s regaining the trust of the markets, Greece will have to issue more bonds in the next 10 months and boost its privatization proceeds. Past experience shows this won’t be easy. A series of privatization projects, including the landmark sale of the old Athens airport site, have been hit by delays.

Greece needs “reforms that will attract investment, particularly from abroad,” said Athanasios Vamvakidis, a strategist at Bank of America Merrill Lynch in London. “However, this is where implementation has been the slowest.”

High Yields

Continuing ambivalence over investments ahead of yet another review of the terms attached to Greece’s emergency loans have weighed on market sentiment. The government’s borrowing costs haven’t dropped since the country sold its first bond in three years on July 25, raising doubts on whether it can fully regain market access by the time its bailout ends.

Greek officials said they plan two or three more debt sales in the coming months that could help Athens raise 4 billion to 6 billion euros ($7.1 billion). The country is also planing to bundle bonds in circulation from its 2012 debt restructuring to create more liquidity in market and pave the way for the new issues in 2018.

The benign scenario of a clean exit assumes a swift completion of the dozens of reforms attached to the next tranche of Greece’s bailout loans.

Greece and its European creditors have said they want to complete the review by the end of the year, allowing for the disbursement of more loans, which will also be used to clear arrears, thus easing a liquidity crunch that has been holding back recovery. Investors are still skeptical, as almost all previous reviews have run behind schedule amid disagreements with the IMF over budget goals and the health of the country’s financial system.

Review Delays

“We should know by now that long delays in concluding program reviews hurt the Greek economy,” Vamvakidis said, adding that “the next program review will also be difficult, given its focus on structural reforms. Greece should break from the past and conclude this review on time.”

Even if this time is different, it’s not be enough to convince skeptics that a clean exit is a good idea. One official said leaving the bailout would mean junk-rated Greek banks won’t be eligible for a waiver allowing access to ECB’s normal refinancing operations. They would have to convert as much as 6 billion euros into Emergency Liquidity Assistance, which carries a 150 basis points penalty over regular credit lines.

The ECB has also said that it will consider including Greek government bonds in its asset purchase program once additional debt relief measures are implemented. But its rules won’t allow it to buy junk-rated Greek bonds if the country exits its bailout in 2018, even if quantitative easing is still in place.

The prospect of exclusion from QE may weigh further on Greek bond yields, as accelerating global growth sets the stage for across the board increases in interest rates. For some officials though, the real concern is the lack of trust that Greece will have fiscal discipline once bailout auditors leave.

“The creditors want their money back and are concerned that Greece could go back to its old bad habits without monitoring,” said Vamvakidis.

Strait Jacket

Brussels is working on checks that go beyond what’s envisaged in the euro area’s fiscal rules, which dictate continued monitoring of bailed-out countries until they repay 75 percent of their loans. Even with a clean exit, Greece will likely be restricted in what it can do, as it will be bound by commitments it has already made for its long-term fiscal performance.

What’s more, any debt relief Greece is granted at the end of the program could be contingent on the country honoring pre-agreed reforms. One official said the fear of having to request another bailout will keep future governments from escaping this strait jacket.

“A year from now I expect Greece and the creditors to have agreed to a new arrangement, which will be similar to a formal program, but won’t be called that, and will include conditions for gradual debt relief in the form of maturity extensions, which in turn will also depend on the economy’s growth,” said Vamvakidis. 

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