You are here

Euro zone ministers eye Greek debt deal with IMF, new loans decision in June

Jeroen Dijsselbloem.jpg
The chairman of euro zone finance ministers Jeroen Dijsselbloem told a news conference that work was progressing for the disbursement to take place "before the summer".

[BRUSSELS] Euro zone finance ministers failed to agree on debt relief for Greece with the International Monetary Fund on Monday and did not release new loans to Athens, but came close enough in talks to aim for both deals at their next meeting in three weeks.

Greece needs new cash from the euro zone to avoid a default in July when it has to repay some 7.3 billion euros (S$11.37 billion) worth of maturing loans. To get the money, the Greek parliament approved pension cuts and tax hikes last Thursday.

But for the disbursement to take place, Greece needs to implement some 140 "prior actions" - laws that have to be passed to make the reforms stick - and even though most of them had been done, some still remained to be completed.

The chairman of euro zone finance ministers Jeroen Dijsselbloem told a news conference that work was progressing for the disbursement to take place "before the summer".

Market voices on:

The other reason why no new loans could be agreed was the lack of agreement between the euro zone and the IMF on debt relief for Greece.

Several euro zone governments, notably Germany, do not want to pay out any new loans until the IMF joins the bailout, and the IMF says it can only do so if it gets more clarity from the euro zone on what kind of debt relief it will offer Greece at the end of the bailout in 2018 to make its debt sustainable.

"The Eurogroup held an in-depth discussion on the sustainability of Greece's public debt but did not reach an overall agreement," the euro zone ministers said in a statement.

"Work will continue in the coming weeks within the framework agreed in May 2016 with a view to reaching a definitive conclusion at the next Eurogroup meeting. This includes an ambitious and economically sound medium-term primary surplus path for Greece," the statement said.

The ministers and the IMF agreed Greece would keep a primary surplus - the budget balance before debt servicing - at 3.5 per cent of GDP for five years after the end of the bailout in 2018, before the surplus can fall.

Agreement on debt was not possible because the IMF wants the euro zone to give more detail to a declaration from May 2016 in which the ministers describe some of the actions they could take, if necessary, to keep down Greek gross financing needs.


But the euro zone does not want to make such promises now, and while Mr Dijsselbloem said the ministers discussed in detail various scenarios of debt relief with the IMF on Monday, they insisted all final decisions would only be made after the end of the bailout in mid-2018.

"The Eurogroup today has made quite clear that it is ready and prepared to specify further what could be envisaged if needed, in terms of debt relief," Mr Dijsselbloem said.

"Of course, there are two guiding principles for the Eurogroup: that it needs to be inside the package that we had already agreed on 16 May, and that the final decision on what is actually needed and will be put in place, in terms of debt relief, will be taken at the end of the programme," he said.

In May 2016, the euro zone promised to extend the maturities and grace periods on Greek loans so that Greece's gross financing needs are below 15 per cent of GDP after 2018 for the medium term, and below 20 per cent of GDP later.

But the IMF would like to know by how much the maturities and grace periods could be extended - a level of detail the ministers could discuss, but not commit to now.

The Eurogroup also said at the time it would consider replacing more costly IMF loans to Greece with cheaper euro zone credit and transfer the profits made from a portfolio of Greek bonds bought by euro zone national central banks back to Athens.

But all that could happen only if Greece delivered on its reforms by mid-2018 and only if an analysis showed Athens needed the debt relief to make its debt sustainable.

The IMF believes that debt relief, or at least a clear promise of it now, is clearly needed. It is also important to restore investor confidence in Greece, especially if the country, which has public debt of almost twice the size of its GDP, is to return to market financing.

But Germany and its allies believe that if Greece keeps its primary surplus high enough for long enough and with the current cheap loans from the ESM, debt relief would be unnecessary.

An unconditional debt relief promise is difficult to swallow for Germany, which faces elections in September, and several other countries, which all want to retain some leverage over the Greek government to make sure it delivers on all the promised reforms until 2018.