Greece’s creditors agreed to release 8.5 billion euros ($9.5 billion) in new loans for Athens, capping a key chapter of the country’s bailout and ending months of uncertainty over whether it could meet large bond payments due in July.
The decision came after euro-area finance ministers sought to offer more clarity on Greece’s future debt path and outline possible measures they could take to ease its burden in the future. Meeting in Luxembourg on Thursday, they reinforced their commitment to extend Greece relief if needed and offered more specifics on what this could entail. But they stopped short of providing definitive steps, which they said would only come at the end of the current bailout in mid-2018.
“It’s a very constructive decision that will help Greece, also on the international market, to gradually get more credibility,” Luxembourg Finance Minister Pierre Gramegna said after the meeting. “The goal is for Greece to go back to the markets in the coming months or year.”
The accord, however, wasn’t enough to get the International Monetary Fund to agree to lend to Greece now, something euro-area countries have sought since the latest bailout was inked in 2015. The Washington-based fund, which co-financed Greece’s first two rescue programs, held off giving the country more loans until it becomes assured that Greece’s 315 billion-euro debt will become sustainable.
Instead, the IMF would suggest its board sign off on a 14-month-long bailout for Greece, but only dole out fresh loans once it receives further assurances from the euro area on how debt will be made sustainable.
“I will be proposing to the IMF executive board the approval in principal of a new precautionary stand-by arrangement for Greece,” IMF Managing Director Christine Lagarde said. She added that the amount of this program will be “probably in the range of $2 billion” that would depend on debt-relief measures materializing.
The compromise leaves Greece with less than what it had sought. A recognition by the IMF that Greek debt will become sustainable could have cleared the way for the country’s bonds to be included in the European Central Bank’s quantitative easing, which would cut borrowing costs and ease its return to the market — a promise the government in Athens has been making for months. But without the fund’s approval, inclusion in the central bank’s asset purchases program remains unlikely, according to EU officials.
“We take note of the Eurogroup discussion which we see as a first step towards securing debt sustainability,” a spokesman of the European Central Bank said in an emailed statement.
EU officials have said Greece shouldn’t rely on participating in the ECB’s quantitative easing program given that it was never a certainty and have pointed out that very few of its bonds are eligible for inclusion. Instead, they have raised the possibility of an enhanced payout to give Athens a buffer in case it wants to try tapping the public markets.
“I’m much happier today than I was a week ago,” Greek Finance Minister Euclid Tsakalatos said after the meeting. “We don’t want the perfect to be the enemy of the good.”
The deal could lift the veil of uncertainty clouding the economic outlook of Europe’s most indebted state, as it caps debt refinancing costs to 15 percent of its gross domestic product for the medium term, and 20 percent thereafter. Meanwhile, creditors agreed that Greece’s primary surplus, which excludes interest payments and is a key determinant of how much debt relief the country will need, will be around 2 percent of GDP from 2023 until 2060.
Member states also agreed to include an extension of average weighted maturities and the deferral of interest payments on some Greek bailout loans by as much as 15 years. The measures will be triggered next year, to the extent that this will be deemed necessary by a debt sustainability analysis.
Meanwhile, following efforts by the French Finance Ministry, a provision was added to “recalibrate” the debt-reprofiling to account for changes in the country’s growth. The details of this mechanism will only be specified at the end of the bailout, alongside the rest of the debt-relief measures, but the aim is to ensure that if Greece is growing less than expected it would have to repay less of its debt.
In the longer term, “in the case of an unexpectedly more adverse scenario, a contingency mechanism on debt could be activated,” the statement by the ministers said. The mechanism could entail measures such as further re-profiling of Greek loans and the capping and deferral of interest payments, the statement said.