Preliminary deal reached on Greece bailout

Last week, Greece and its international creditors reached a deal on a series of reforms that paved the path for progress in its bailout process. Greece would receive a bailout of around €7 billion in new rescue loans. The breakthrough following a long impasse over multiple issues on the bailout cleared the way for the release of the next tranche of funds crucial to Greece’s economic revival.

Staff teams from the European Commission, European Stability Mechanism, ECB and IMF reached a preliminary agreement with Greek authorities on a policy package to support the country’s recovery. Greek authorities have confirmed their intent to swiftly implement a package of 140 separate actions in return for a new round of aid from the European Stability Mechanism bailout fund. The process is already underway. The new legislation is required to execute around 60 actions, including healthcare changes, increasing the powers of the new independent revenue agency, the rollout of a guaranteed minimum income scheme, and labour market reforms. This preliminary agreement would be complemented by further discussions in the upcoming weeks on Greece’s debt sustainability and would determine the IMF’s participation in the bailout programme. The package includes two additional fiscal measures for 2019–2020: cuts in pensions and income tax credits, each costing 1% of the GDP. These may be offset by additional social spending if Greece continues to exceed its target for the primary budget surplus.

Creditors demanded that Greece pass a single law by 18 May to implement a slew of economic reforms before Eurozone ministers meet on 22 May to sign off on the new loan. The funds are required to help Greece to repay big debts in July. The reforms would also clear the way for talks with the Greek government on new debt-relief measures. If there is no agreement on 22 May, Eurozone finance ministers will meet again on 15 June.

 

Growth forecast and primary surplus

The uncertainty over the outcome of the talks is weighing on the country’s economy, despite progress in the long-stalled bailout. The growth forecast for 2017 (to be published on 11 May) would be revised downward from 2.4% to approximately 2%. Meanwhile, Greece surpassed its financial targets. The primary surplus was 4.2% of economic output in 2016, beating the 0.5% of GDP target for the year and much ahead of the 3.5% target set for 2018.This outperformance could be attributed to one-off events such as higher tax revenues. If Greece continues to achieve a primary surplus target of 3.5%, the cuts in pension and tax credit would be offset by additional spending on welfare benefits, public investment and measures to support the labour market.

 

ASE weekly performance

Greece’s stock markets ended higher for the second consecutive week as Greece reached a deal with its creditors. The Athens Stock Exchange (ASE) added 5.9% to 753.99 for the week ended 5 May, 2017 after gaining 6.0% in the previous week. Subsequently, the Athens Banking Index (ASEDTR) expanded 11.8% during the week.

 

Exhibit 1: ASE’s YTD performance, banking sector sub-index

graph

 

Source: Bloomberg

 

However, uncertainty still exists, given the IMF’s unwillingness to join the bailout programme, as the agency considers the debt load unsustainable. Germany has insisted that IMF join the programme, being hostile to the idea of a debt cut, as it is the biggest single contributor to a bailout that would exceed €180 billion once the next tranche of loans is issued.

 

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