About last night

Agora Contributor: Yiannis Mouzakis
Photo by MacroPolis
Photo by MacroPolis

The most tumultuous period in Greece’s modern history concluded in the middle of the night, with just a few usual suspects to share the moment on Twitter, a World Cup game being replayed on the television and the live stream of a Eurogroup press conference on the laptop screen.

It seems like an anti-climax for a development that is so significant and had been anticipated for so long. At the same time, though, it is quite fitting given the long and sleepless nights caused by Eurogroup meetings that have decided Greece’s fate over the last nine years.

It took eurozone’s finance ministers nearly half a day to reach a deal at 1:30 a.m. on Friday regarding the package of debt interventions that would, in theory, make Greece’s debt sustainable and reward the country for its efforts over three programmes that consisted of 275 billion euros in loans.

The deal that was finally reached, is on balance, slightly more generous compared to what was expected based on briefings by people involved in the discussions and within the framework that was set out at the Eurogroup meetings of May 2016 and June 2017. 

EFSF loan extensions

Expectations were low initially as the news from Germany was that the new finance minister, Olaf Scholz, was not willing to discuss the extension of loan maturities beyond 3 years and wanted a link between how much would be disbursed in the last tranche for the cash buffer and the duration of the loan extension.

It was decided in Luxembourg that the extension would stretch to 10 years, which will see Greece paying off the EFSF loans it received as part of its second bailout probably in the 2060s, taking the average loan maturity to over 40 years from 32.5 years currently.

EFSF interest and amortisation deferral

The deferral of EFSF interest payments and amortisation by 10 years was probably one of the most positive developments at the Eurogroup. The EFSF loan package came to a total of 130.9 billion euros and was due to be repaid from 2023. The first instalment stood at 2.3 billion euros.

Interest payments on those loans were also expected to kick in from 2023, when the previous grace period was due to expire. This would require an additional 1 billion euros from the budget.

Overall, the new grace period keeps Greece cushioned from the need for regular market access to meet these loan maturities, while overall servicing of the debt is kept at manageable levels. This also has a positive effect on the need for large primary surpluses to keep the debt trajectory under control.

SMP and ANFA profits

In line with expectations, roughly 4 billion euros in profits from the European Central Bank and other eurozone central banks will be disbursed to Greece over a period of two years in semi-annual instalments and tied to reform commitments. Most importantly, they will also be tied to the fiscal path.

Greece has committed to lowering pension expenditure by 1 percent of GDP and increase the tax base by lowering the tax-free threshold to bring in an added 1 percent of GDP in revenues.

Liability management

The funds made available for buying back debt was an area where the outcome probably did not meet expectations. There was an assumption that Greece’s lenders would minimise its need for market access by purchasing the International Monetary Fund’s loans since there would be more than 25 billion euros of unused funds in the programme and the IMF has just over 10 billion euros of loans due to be paid by Greece over the next six years.

It seems that instead, eurozone finance ministers opted for an amount of roughly 3 billion euros that was included in the disbursement for the cash buffer and which Greece can use to buy parts of the near-term IMF loans and reduce its market access needs.

Cash buffer

In the previous compliance report by the European Commission, Brussels had estimated an amount of just over 10 billion euros could be used for building up the cash buffer based on the planned disbursement schedule for 2018. In the end, though, eurozone finance ministers did not want to increase their exposure to Greece and the cash buffer came in line with expectations.

The Eurogroup statement estimates the cash buffer that will be created by ESM funds and Greece’s own resources will reach 24.1 billion euros, meaning Greece will be fully funded until the summer of 2020.

Post-programme surveillance

It would be naïve to expect that after having committed more than a quarter of a trillion in loans and seeing relationships with all types of Greek governments sour, Greece’s lenders would miss an opportunity to ensure the maximum supervision possible, especially in the near-term.

Part of the reason that the IMF has been persuaded about the sustainability of Greece's debt in the medium-term is that Athens has to produce primary surpluses of 3.5 percent of GDP this year and all the way up to 2022. It is only to be expected, therefore, that the European lenders want to ensure that these targets are met by keeping a close eye on the government. Any slippage could mean that the Fund raises concerns about medium-term debt sustainability, not just long-term.

Greece will not be in a programme but it will have limited room for policy choices, at least those that have fiscal impact and can put targets in jeopardy.

IMF and debt sustainability

The view of the IMF as expressed by managing director Christine Lagarde at the post-Eurogroup press conference was that the Fund is comfortable with what was agreed in the medium-term but that there are reservations about the longer term.

As time has run out, there will be no IMF programme activated and the Fund will stay as a technical advisor in the post-programme period, monitoring Greece in its regular Article IV consultations. The next one is expected in July.

The Fund argued its case on the long-term situation in Greece comprehensively last summer, when Greece requested the precautionary credit line.

The IMF’s estimates for Greek growth are much more conservative than the eurozone because it believes Greece faces historical productivity challenges and future demographic challenges. It will require a formidable turnaround to push Greece’s long-term growth potential to more than 1 percent in real terms, the IMF forecasts. 

Additionally, the Fund finds it unrealistic for Greece to be expected to deliver primary surpluses of more than 2 percent of GDP for the next four decades. It cites historical evidence from Greece and other cases showing that primary surpluses which follow tough fiscal consolidations are often reversed and that Greece does not have a history of sustained fiscal savings, running deficits that average 3 percent over the last 70 years. 

In the same document, and taking into consideration the scope of measures for the medium term that were agreed last summer, it sees Greece’s funding needs growing significantly after 2040. 

The IMF would have liked to have those long-term concerns addressed up front with specific debt commitments should its set of assumptions prove to be more accurate.

As things stand, this will have to be addressed solely by the eurozone’s pledge that if financing needs seem to breach the 20 percent of GDP long-term threshold because of adverse macroeconomic outcomes, more measures could be considered “such as a further re-profiling and capping and deferral of interest payments of the EFSF to the extent needed to meet the GFN benchmarks defined above.”

On balance, this is a deal that Greece can live with and is a fair compromise considering it required the consensus of 17 different countries, numerous domestic political considerations, four different international organisations and an unstable global environment that demands an ongoing balancing act from leaders at home and the European stage.

The combination of short and medium-term debt interventions have kept repayments well into the future and debt servicing costs at a minimum, while there is a commitment that should this discussion become necessary again in the future the eurozone will be willing to further relieve the debt load.

At the same time, Greece is left with very demanding fiscal targets during a period that it should not be keeping its belt tightened following a depression of historic proportions that took out a quarter of its economy. Meeting the longer term fiscal targets will also require its public sector to become more efficient in revenue collection and the economy to be growing in an uninterrupted manner for decades.

I doubt anyone involved does not realise that the assumptions that currently allow them to do the bare minimum and take the least politically costly steps on the debt front will be put to the test in the not-too-distant future and the issue of Greek debt will need to be revisited.

Prime Minister Alexis Tsipras can only look back and wonder what he was thinking in those first six months of 2015. That period is probably the biggest political miscalculation there has been in Greece in modern times.

Just a year after staring into the abyss in June 2015, there was an agreement for short-term debt relief measures that were almost immediately implemented, and, in the summer of 2017, the medium-term debt relief measures were reaffirmed. Now that the third programme is coming to an end, they have been agreed.

If he chose a different tack when he took over in January 2015, he could have had this debt framework sooner, growth earlier, better functioning banks and no capital controls. Despite all the tribulations of the first half of 2015, Greece has not tanked. It has been growing since last year. But the opportunity cost will always haunt him.

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