Greece Risks Fall As Potential For Debt Relief, QE Rise

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UBS | Positive developments for Greece and broader European assets Monday’s Eurogroup on Greece contained a number of positive developments relating to the country’s on-going programme review as well as debt relief. We expect those developments to support Greek and broader European risk assets, where we have argued for upside (see most recently “Which risks to fade; which risks to take” ).

Progress on two fronts: current programme review closer to being completed…

First, the Eurogroup endorsed the package of measures voted through the Greek parliament on Sunday and detailed the next steps and actions required for completion of the current programme review. Overall, there is now ag reement on the broad policy framework, paving the way for completion of the first review (hopefully) on 24 May. It is also worth recalling that completion of the review will also be accompanied by the reinstatement of the ECB collateral requirement waiver for Greek banks.

…and a debt relief framework is now established

Secondly, the general framework for debt relief/official sector involvement (OSI) has now been outlined. Its main tenets are the following: a) debt relief will be conditional upon Greece impl ementing the reforms it has promised; b) a framework to assess Greece’s debt sustainability on the basis of the country’s gross financing needs (away from debt-to -GDP) is introduced; c) a roadmap to implementing debt relief is laid out.

This roadmap stretches out in the short term (through an optimisation of Greece’s debt management, mainly via the ESM’s own funding strategies); the medium term (at the end of the programme in 2018 via extension of maturities); as well as the longer term. Crucially, Eurogroup President Dijsselbloem drew a distinction between the 3.5% of GDP primary surplus targets required in the context of Greece’s current program to be achieved in the medium term from the appropriate level of primary surplus required of Greece in the long term , thereby hinting at the prospect of smaller primary surpluses for Greece once the medium-term fiscal adjustment is deemed to be complete.

Positive mix: Less political uncertainty, greater debt relief clarity, QE potential

This is the first time there is clarity on debt relief as well as a clear signal that Eurozone member states are willing to act on Greek debt. Additionally, the allusion to lower long-term primary surpluses is arguably not only macroeconomically sensible but a way to satisfy the political desideratum of keeping the IMF involved in the Greek bailout. Finally, the above helps the Greek government build its success story via programme compliance, thereby incentivising it to persist on the conciliatory path with its creditors. The formal c ommencement of the debt relief discussion will begin after the conclusion of the current review while the technicalities of the package will be discussed again at the 24 May Eurogroup meeting. Remaining loose ends are passing through parliament the last few prior actions and obtaining the IMF’s full consent on the policy package.

These developments are good news for Greek assets (both GGBs and equities) but also risk sentiment in Europe (especially in peripheral bond and equity markets) and negative on the margin for core European yields. ECB QE eligibility is the light at the end of the tunnel for Greek assets (especially GGBs). For this to happen, however, Greece not only needs to satisfy the standard criteria set by the ECB for programme countries but th ere also needs to be an assessment regarding the sustainability of Greek debt. This probably means that QE eligibility will have to wait at least for the debt discussions to conclude in Q3/early Q4. Nonetheless, the complexity of this issue and the gradual and conditional process of debt relief could result in further delays on this count.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.