The Gruelling Final Straight Of Greece’s Third Bailout

Greece is meeting fiscal targets and concludes program reviews on timeTourists take photographs atop of the ancient Acropolis hill in Athens.

Nick Malkoutzis via Macropolis | Much of the attention (domestically, at least) regarding the Greek programme has been on whether a precautionary credit line is needed or not. This has obscured other important elements that need to come together if the country’s third bailout is to be wrapped up promptly and successfully (to the extent this is possible) before it expires on August 20.

The problem with the debate about whether Greece should seek a precautionary credit line rather than a cash buffer, estimated at somewhere between 14 and 19 billion euros, to support its programme exit is that it can become all-consuming without any purpose.

There are valid arguments on both sides. The credit line, or PCCL, would provide Greece with extra insurance if markets are more turbulent than expected when it leaves the programme and bond yields become prohibitive. The cash buffer, though, gives a clearer signal that Greece is leaving behind its eight years under a programme and, armed with debt relief and an economy that is growing again, can move forward.

The credit line would come with greater conditionality, which gives the European lenders and sceptics in Greece greater assurances that reforms will continue. But from the current government’s (in fact, any Greek government’s) point of view, the prospect of signing up to further conditionality is not only politically toxic but could also dampen the positive sentiment of a cleaner exit.

These are just some of the reasons that there is no common position among Greece’s lenders on this issue. The European Commission, for instance, is in favour of the cash buffer, while the European Central Bank seems to prefer a PCCL. There are also contrasting views among the member states, with some apparently liking the security of the PCCL and others not.

In the end, though, this turns into an academic debate. Firstly, the precautionary credit line can only be offered for 12 months, and then renewed for two six-month periods. It cannot provide Greece with endless protection. As the head of the European Commission’s mission for Greece, Declan Costello, said recently: “Greece cannot continue in a programme forever.”

Secondly, the PCCL can only be activated if the Greek government makes such a request. The SYRIZA-Independent Greeks (ANEL) coalition in Athens has made it clear it has no such intention. It would take a dramatic turn of events in the coming months for this view to change.

So, if we set aside the credit line debate, we can concentrate on what needs to happen in the coming months for Greece and its creditors to reach a satisfactory conclusion to the third programme in August. A closer look at what remains to be done shows that Athens and the institutions (particularly the former) will be racing against the clock to resolve complex issues.

Key deliverables

The Greek government has to complete 88 “key deliverables” as part of the fourth review and only a handful appear to have been done so far. A number of these have proved tricky for the coalition, including the recalculation of objective property values and the appointment of senior civil servants.

Ideally, the institutions would like to return to Athens in early May so that there can be a staff-level agreement (SLA) on the fourth review, which would be rubber-stamped at the Eurogroup later that month. This would open up the path for the political decisions on debt relief and the post-programme surveillance to be taken by the June 20 Eurogroup.

There are, therefore, two distinct challenges to address in the coming months. On the Greek side, the government has to go all out to complete the 88 prior actions. In the past, any reforms that were not completed or could not be agreed upon were deferred to a future review. This cannot happen now, though, as there will be no further reviews unless the programme will be extended – an option that Athens and the creditors say is not on the table.

Greece also has to produce by early April its growth strategy, or “holistic” plan, for the future. The European Commission hopes that the policies included in the scheme can be fed into the debt sustainability analysis (DSA) and improve the picture for the future based on enhanced growth potential. Others, though, doubt that the government’s strategy will be able to move the needle at all.

Debt and surveillance

On the lenders side, common ground has to be found on the issues of debt relief and future monitoring of Greece. We are still some way from any kind of agreement being reached, despite discussions on debt restructuring measures, including the so-called French mechanism (which would see Greece receive top-up relief if its economy misses growth targets) already taking place at a technical level.

The initial plan was for debt relief to be discussed at this Monday’s Eurogroup but no such talks took place. Instead, the aim now is for the issue to be addressed on April 24, when eurozone finance ministers meet in Sofia. Apart from the fact that Germany’s new government has not been in place, thereby complicating discussions on this sensitive topic, the International Monetary Fund remains at odds with the eurozone over the type and level of measures needed to make Greek debt sustainable.

The Fund does not seem convinced so far that the French mechanism will be enough to make the difference it would like to see. There are also differences in several other related areas, including future revenues from privatisations and how debt relief will be delivered – will it be a set schedule of interventions or will they be linked to specific policies or conditions?

The latter issue also feeds into the discussion around the type of monitoring that the eurozone will employ after Greece exits the programme. This also has not been completely settled.

“In the first place, Greece will fall under the surveillance frameworks related to the Stability and Growth Pact and the Macroeconomic Imbalance Procedure, just like every EU member state,” said European Stability Mechanism managing director Klaus Regling at the recent Delphi Economic Forum. “In addition, Greece will be subject to the normal EU post-programme monitoring, which will also take place under the ESM early warning system. This assesses if a country is in a position to pay back its loans,” said the ESM chief, adding that this system is also applied for the other countries that exited MoUs: Portugal, Spain, Ireland and Cyprus.

He added, however, that the difference in Greece’s case is it will be receiving debt relief from its European lenders, which may make its monitoring different to the others in the future. “If Greece requires additional debt relief measures, the post- programme surveillance may be tightened,” Regling said.


The other area of disagreement between the eurozone and the IMF is on the fiscal side. The Fund continues to believe that the reduction of the tax-free threshold for incomes (worth an amount equal to 1 percent of GDP) has to be implemented in 2019, rather than 2020. Bringing it forward a year would mean that it is activated at the same time as the pension cuts lined up for 2019 (also 1 percent of GDP).

European Economic Affairs Commissioner Pierre Moscovici reiterated during a news conference on Tuesday that he does not feel this is necessary and that Greece can reach its 3.5 percent of GDP primary surplus target next year without taking any more measures than those already planned.

Naturally, the SYRIZA-led administration is of the same view. According to a report in Naftemporiki on Saturday, the Finance Ministry expects that final data will show that the 2017 primary surplus was 3.4 to 3.5 percent of GDP, compared to the most recent estimates of 2.44 percent. This includes the outlay for the social dividend, the report adds.

Athens believes this will strengthen its position as it will be able to argue that the 3.5 percent primary surplus target be in place from this year until 2022 was reached in 2017 despite growth being 1.4 percent, which is lower than what is projected for this year and the coming period.

All these facets highlight what a complex period we are entering, even if we discard the tug-of-war over the precautionary credit line. Over the next five months or so, the government will have to furiously plough through dozens of reforms and produce something that no Greek administration in recent history has done: A plan for how to help the economy grow in the coming years. The country’s creditors, meanwhile, will have to settle several complex issues, starting with what kind of debt relief to offer Greece and on what terms. Regardless of whether the IMF remains on board or not (given that this will only be clear from June onwards, just two months before the programme ends, it will be largely symbolic in nature), some difficult discussions between the lenders lie ahead.

And to think we have not even got to the really hard part yet, which is how to ensure Greece builds momentum upon exiting the programme and generates the kind of economic activity that will help heal the deep wounds of the crisis. That is a debate that will have to wait for another day, but cannot be put off for too long.

About the Author

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.