Daily Management Review

Greece gets € 8.5 billion in exchange for austerity measures


Greece will avoid a default in July since European creditors agreed to allocate € 8.5 billion for the country. The delay in payment became possible thanks to unpopular reforms in the country, because of which thousands of impoverished Greeks took to the streets. At the same time, the ECB still does not intend to include Greek bonds in the quantitative easing program, which may hinder further debt reduction.

The credit allocation was a kind of recognition of the actions of the leftist Greek government, which went on unpopular reforms to avoid default due to obligations on payments to creditors next month.

"At last we saw the light at the end of the tunnel", Finance Minister Euclid Tsakalotos told journalists after the meeting with his European counterparts.

The agreement gives other investors clarity that Greece can cope with the existing debt burden and eventually return to borrowing in the market. Given the IMF’s desire to see "more specifics" in debt relief issues in Greece, the euro zone finance ministers noted in their statement that in 2018 they will be ready to consider extending the maturity of loans and permissible deferred payments for them in the range from zero to 15 years. The average repayment term is now 30 years, notes Reuters.

For almost two years, Greek Prime Minister Alexis Tsipras has been telling compatriots that the debt deal and the inclusion in the quantitative easing program of the European Central Bank (ECB) will create conditions for the investment boom in the country. This, in turn, will allow to cope with the consequences of the austerity regime. Now, Greeks have ceased to believe the speeches of politics, and the ratio of public debt to GDP is 179%.

To alleviate the debt burden, the Greek government had to agree to the IMF (and German Finance Minister Wolfgang Schaeuble) claims for a 18% reduction in pensions and an increase in taxes that will come into force in 2019. The decision caused a wave of discontent in the society, and resulted in mass protests in the streets of Greek cities. "The Greek government has fulfilled its part of the deal. Now the EU ministers must confirm the sustainability of the Greek debt", said ECB Executive Board member Benoit Coeuré in an interview with Bloomberg Television on Monday.

While the European ministers conferred in Luxembourg, pensioners from all over Greece gathered in front of the country's parliament on Constitution Square to protest against the already implemented austerity measures.

While ECB stimulus measures, including the asset purchase program, revive economy of the rest of the euro area, productivity in Greece remains at the same level, and the forecast for the country's economy is the most pessimistic in the region. However, according to a source familiar with this issue, the ECB does not plan to include Greek bonds in the quantitative easing program in the foreseeable future, writes Bloomberg.

"The debt became a brake on growth at a time when the Greeks were supposed to be able to rebuild their lives", Alexis Tsipras wrote in an article for Die Welt.

Despite some signs of a rise in industrial production, Greece's GDP was heavily dependent on consumers and a thriving tourism sector. In the first years of the crisis, the country's economy shrank by almost a quarter. Even absence of a recession since 2015 (and also an increase of 0.4% in early 2017) has not yet helped the country to recover to its previous level: over the past ten years, growth was only two quarters in a row, but no more. Greece's savings rate has been negative since 2014 and at the end of 2016 it was at -8.9%, according to the Greek Statistical Office.

Consulting company PriceWaterhouseCoopers said in March that investments in infrastructure fell during the crisis, resulting in a gap of over € 21 billion for planned and unfinished projects. In particular, it concerns railroad transportation, waste removal, construction of roads and ports. Local residents note that only the public sector can stimulate growth in the present situation, because private business "has been killed", and foreign investors will not invest in local projects, given the difficulties with taxation (corporate Greek tax rate of 29% is one of the highest rates in the EU).

The former Greek finance minister, Giorgos Papakonstantinou, said Germany is guilty of long-term defaults on promises to alleviate the debt burden, CNBC reports.

"It seems that we are held hostage between the competing demands of the IMF on the one hand and Germany on the other", Papakonstantinou noted. He explained that if Germany agreed to alleviate Greece's debt at a meeting of euro zone finance ministers in the past, it would allow the IMF to join the rescue and give the country additional credit. Although IMF’s assistance is more expensive for Greece, the fund’s support gives more credibility to the reforms demanded by European creditors.

Germany's reluctance to make concessions is simply explained: a part of the country's government fears that Greece's large financial assistance may cost the country votes during the September elections to the Bundestag, notes Deutsche Welle.

However, dissatisfaction with the "too generous" support for Greece was also expressed by other EU countries, especially from the eastern - less well-endowed - part of the bloc.

Meanwhile, France, which is trying to help countries overcome differences over the issue of debt, proposed to automatically reduce loan payments when Greece does not meet the target growth targets. Some politicians view this proposal as a step in the right direction, but doubt that this will be enough to convince the ECB to include Greece in the bond purchase program, especially if the IMF comes to the conclusion that the country can cope with the debt. Other members of the euro zone are still against this offer.

Although the ECB does not seek to include Greek bonds in the quantitative easing program, the yield on them has been much higher recently than on bonds of other European countries, as the prospect of a deal with creditors reduced the risk of default. However, in general, they depreciated significantly during the year: on Wednesday, the yield on Greek bonds due in 2019 fell by 20 basis points, to 4.94%, while a year ago they traded at a yield of 11.7%.

It is also important that the European regulator plans to gradually wind down the program of buying up bonds: experts agree that the program will be completed in August 2018.

source: bloomberg.com, dw.de