Greece – relieved but not redeemed

Greece and EMU creditors agreed surprisingly quickly in the Eurogroup meeting to a plan for implementing debt servicing relief measures for Greece. This makes provision for the following measures: deferral of interest and redemption payments on EFSF loans for a further ten years and maturity extension by ten years of loans with a total value of about EUR 100bn. Furthermore, financial relief measures such as the distribution of ESCB profits of around EUR 4bn up to 2022 is anticipated if Greece continues along the path towards reform of recent years. Besides this, Greece undertakes to maintain a primary surplus of 3.5% of GDP until 2022. Thereafter, budgetary discipline is also to be maintained in the long term. For this purpose the European Commission calculates a budget balance before interest of EUR 2.2% of GDP until 2060. Further debt servicing relief measures are anticipated in future.

Greece is also to receive a further EUR 15bn as a final tranche under the third ESM assistance programme, due to expire on 20 August. Thus Greece’s path to financial sovereignty has been smoothed, at least temporarily. Together with a primary surplus and planned government bond issues the liquidity cushion should suffice to guarantee the refinancing requirement until the end of 2019. In the long term it is likely to remain difficult for Greece to stand on its own feet in fiscal terms. The announced debt servicing relief measures, which slightly reduce the present value of the liabilities, are likely to be insufficient for lasting debt sustainability. Even the new conditions are hardly likely to prevent future Greek governments from moderating the path towards reform of recent years. Domestic political pressure is simply too great due to the threat of social upheaval. At the same time the decades of high primary surpluses considered necessary for debt reduction are hardly likely to be realistic. Against this backdrop Greece’s fiscal situation has been relieved somewhat for the time being, but the country and its creditors are far from being redeemed.

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