Reuters: Euro zone to link debt relief to sound future Greek policies

Euro zone creditors are working on a debt relief offer for Greece that would be an incentive for Athens not to backtrack on reforms from its three international bailouts and to continue to stick to prudent fiscal policy, senior EU officials said.

Greece is to exit its bailout on Aug. 20 and return to market financing after eight years of living on cheap euro zone loans it got in return for painful reforms, after investors refused to lend to it in 2010 because of its ballooning deficit and debt.

Once the bailout ends, Greece will be free to set its own economic policy – a political turning point for the country that has long been forced to implement highly unpopular reforms suggested by the euro zone and the International Monetary Fund.

But many officials are worried that as time passes, Greek politicians will be under increasing pressure to loosen budget strings again, so they are seeking ways to make it worth Greece’s while to be fiscally prudent as long as possible.

“The Greek government needs to stick to the implemented reforms and post-program fiscal trajectory, which means sustained large levels of primary surpluses for an extended period of time,” European Commission Vice President Valdis Dombrovskis told Reuters in an interview.

Officials say a well-designed offer of further debt relief for Greece could provide an incentive for Athens not to stray from the agreed reform path and keep a high primary budget surplus – the balance before debt servicing costs – of 3.5 percent of GDP, until at least 2022.

“We think it is fully realistic,” Dombrovskis said. “We expect Greece being on track with the fiscal trajectory.”

Another way of ensuring Greece sticks to sound policies would be through extending a precautionary credit line from the euro zone bailout fund ESM to Greece, because such a credit line comes with conditions.

But this is why Athens does not want it, and the euro zone neither can, nor wants to force Greece into some new bailout in disguise.

Source: Reuters