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Have we committed to history the emergency meetings of the Eurogroup, or even the European Council, dedicated to solving the next Greek case – will it have enough money to pay wages and pensions, will it remain in the euro area, will it draw another loan, will it pay back the previous ones? It looks like the answer to this question is finally “yes”. The fact that Greece has turned a new page in its relationship with its euro area partners has been apparent for the last few months, in which Athens’ actions had been commented on in an approving and even exalted tone of voice. By all accounts the over six-year-long tragedy is coming to an end. On June 6th the Vice-President of the European Commission Valdis Dombrovskis (Latvia, EPP), who is responsible for the euro and Economic and Financial Affairs Commissioner Pierre Moscovici (France, Socialists and Democrats) reported to MEPs what has been done so far on the third Greek bailout programme.

Both of them spared no praises for Greece’s efforts to implement the reforms, requested by the creditors. “[...] the Greek Parliament adopted a substantial package of reforms - indeed, very substantial package of reforms”, stated Mr Dombrovskis on Monday evening. He added that the verification of voted measures is ongoing, in order to make sure they fall within the bailout programme’s requirements, but the already available information is sufficient to say that there is “important progress” towards finalisation. Pierre Moscovici, too, was all positive and even stated he feels optimistic. In his words, transition is being made from legislating towards the implementation phase. 95% of the necessary changes have already been done in Greece, he said, and the remaining 5% are insignificant, meaning they are not likely to block the finalisation of the first review of the third bailout programme, which is expected to be done in the next few days and lead to the release of the second tranche of the programme, amounting to 10.3 billion euro. 

“I'm very optimistic on the next stages of the programme”, said Pierre Moscovici in front of MEPs, who, unlike on many other occasions, were not critical at all and the hearing in general was lifeless and did not focus on details. This means that, at this stage, there are no disagreements on the way forward. And this way was plotted at the Eurogroup meeting of May 25th, when an agreement was finally reached between the International Monetary Fund and European institutions. Actually the disagreement between them did create over the last few months risks for the implementation of the programme, as Valdis Dombrovskis also explained to MEPs on Monday evening. In his words, the delay of the first review led to certain changes in the expectations for the performance of the Greek economy. In the programme, agreed on in August, a recession of 0.7% was expected for 2015 and 0.3% for 2016. 

In 2015, the Greek economy performed better than expected. Results are a bit worse for this year, but still consistent with the forecast. The delay of the review leads to uncertainty. When the review is completed it will give a signal to all players that Greece is back on the straight path, explained Mr Dombrovskis. Pierre Moscovici stated that over the second half of the year the Greek economy is expected to grow by 2.6%, provided it implements all set measures. 

Nominal haircut of the Greek debt as well?

The reason for prevailing optimism is the fact that the creditors have finally agreed on the management of the huge Greek public debt. According to the European Commission spring economic forecast it is going to reach 182.8% of GDP this year and drop to 178.8% next year. The conflict between Europe and the IMF regarding Greek debt sustainability went on for months and threatened the third bailout programme as well. On May 25th, however, both sides made considerable concessions. The main issue between the Washington-based organisation and Brussels was about reaching primary budget surplus (without factoring in the interest on loans) of 3.5% of GDP in 2018, meaning at the end of the bailout programme. The IMF’s calculations, however, showed that the provided reforms and the inconsistency of economic forecasts could never produce more than a budget surplus of 1.5% of GDP. Thus the IMF refused to pitch in on a third bailout programme without a debt haircut. 

This is how it got to negotiating a special contingency mechanism, which would be automatically activated, should economic forecasts fail to unfold according to expectations. There are several agreements after the May 25 meeting, which went late into the night. One of the most important ones is that the IMF backs down on its demand for exact forecasts, because we are dealing with too long of a period in time, for which debt sustainability calculations would be inaccurate. The Eurogroup continues to demand a primary budget surplus of 3.5% of GDP, but only for the year 2018. For the following period it makes a concession, stating that it is only important that Greece moves within the boundaries of the Union’s fiscal rules. Later, in front of MEPs Vice-President Dombrovskis explained that creditors have no intention to demand that a primary budget surplus of 3.5% of GDP be sustained by the year 2060. It is only important it is sufficient so that public debt starts to drop noticeably. 

The second major achievement is the agreement on debt relief. The IMF made a major concession here, but only up until 2018. The Fund backs down from demanding that the contingency mechanism be adopted in advance and agrees to a debt relief of several steps. The first set of debt measures are to be implemented after the finalising of the first review on the programme. They include reprofiling of payments to creditors as well as removing the step-by-step increase of the interest on the payments under the second bailout programme from 2017. If the bailout programme is successfully implemented and need be, there is a second package of measures to be approved, which includes abolishing interest growth from 2018 (again on the second bailout programme), using SMP profits as a new buffer for lowering gross financing needs, utilising unused resources within the EFSF/ESM programmes to reduce interest rate costs and to extend maturities. 

According to Eurogroup boss Jeroen Dijsselbloem (The Netherlands, Socialists and Democrats), those savings are approximately 20 billion euro. They have been saved mainly from the bank recapitalisation funds, after it turned out that the needs of the Greek banking sector were far lower. On June 6th, Pierre Moscovici suggested in front of MEPs that a nominal trimming of Greek debt is possible. If by the year 2018 Greece complies with all of the requirements and operates within the set budget framework (meaning a budget surplus of 3.5% of GDP by the year 2018), more ambitious measures could be approved, not excluding the possibility for “nominal changes”, stated the French Commissioner, not specifying what he envisages. He did, however, point out that there are red lines present. Those are that the programme is not altered by the year 2018 and there is no trimming. 

Valdis Dombrovskis clarified that the debt subject will be raised again at the end of the year when the IMF is expected to prepare a new debt sustainability assessment. Exactly one day prior to the Eurogroup start on May 25 the Fund published a revised assessment, which showed that the necessary conditions for Greece to reach 3.5% primary budget surplus by the year 2018 are lacking. Following the Eurogroup meeting Poul Thomsen, head of the IMF’s European department, stated that he welcomes the recognition that the Greek debt is unsustainable, but expressed confidence that planned measures will have a positive result. 

It all hangs on implementation

Currently, the ball is once more in Greece’s field. Commissioner Moscovici admitted to MEPs that what remains is the heavier part of the programme. He quoted German Finance Minister Wolfgang Schäuble that it is the implementation that matters, but admitted it was all up to Greek authorities. “We know by experience that whatever government rules the country there is a structural problem in Greece which is implementation of reforms”. He did clarify that he is talking about full implementation of all measures under the bailout programme. Partial implementation will not produce the needed results. Pierre Moscovici also said that now is the first time when the euro area has to deal with two problems at the same time – reforms implementation and debt reduction. 

Greece has a clear horizon at this stage. It is expected that next week the Eurogroup will formally approve the release of the second tranche on the programme, having it already approved in the economic committee of the German parliament. Later, the ECB is going to have a new meeting, at which to rebuild its cheap credit line to Greece, which was cut down in February of last year when the Greek crisis returned with a bang to the Eurogroup’s agenda. The political situation in the country also looks stable, so all conditions are present to believe that Greece has truly turned the page. Pierre Moscovici is convinced this is so. He stated to MEPs that it was just a year ago when a Grexit was considered, and now the atmosphere is totally different. Greek authorities are working constructively and create no problems. He extended special thanks to Greek Finance Minister Euclid Tsakalotos. Expectations are that this positivism will carry through over on investors, and most of all on Greek citizens. 

Translated by Stanimir Stoev