The outcome of the most recent Eurogroup meeting was a positive step towards the conclusion of the first review of the Greek program. The large-scale reform agenda of the government was endorsed by the institutions, paving the way for the long-awaited discussion on public debt. In this respect, the orchestrated efforts by the main (conservative) opposition party New Democracy and a number of media to cause political and economic instability in Greece proved fruitless.
During the last six years there was only one general promise on debt relief, in 2012, but neither the creditors nor the then Greek government worked on that with any depth or vigour. This time all parties to the bailout deal have recognized that Greek public debt is not sustainable, thus reaching, for the first time, a unanimous and important agreement on that vital issue. To this end, during the next Eurogroup meeting on May 24, a specific process is about to be clearly defined at the short, medium and long-term level so that the debt can become sustainable, payment schedule fine-tuned, and this coupled with additional and concrete measures that would ease its servicing, such as prolongation of debt maturities and longer grace periods.
There is still much work to be done, but statements like that of European Stability Mechanism managing director Klaus Regling that his body could buy out part of Greece’s loans to the IMF as well as moving to a considerable debt reprofiling, could lead to a significant debt relief, well below 100% of GDP compared to the 180% that we have today.
With respect to the contingency measures that the IMF and the German Finance Minister Mr Schauble were so pressingly and irrationally asking for, it is clear that no such measures will be legislated by or imposed on Greece. On the contrary, the Greek government proposed the introduction of a fiscal correction mechanism that will adjust budget expenditures if any negative deviation occurs.
This mechanism is preventive and the prospects of it being used in practice are very low, especially as Greece is expecting to steadily return to growth. This is also the stance of the European Commission and the ESM that put trust in the Greek government. The compromise that has been reached on that also strengthens the efforts of Syriza to drag the country out of the painful and protracted financial crisis, securing the next tranche of aid that would unlock the financing of the domestic economy and enhance the liquidity of the real economy.
It has to be noted that negotiations between the Greek government and the institutions have seen a major, positive shift during the last week, especially with respect to the stance of the IMF on the debt issue. Nothing has been finalized yet and there is much to be done during the next week, but it is certain that the institutions have recognized the big progress made by the Greek government in implementing the adjustment program and the reform agenda. We are close to a final agreement that could leave us space to focus on the two top priorities: bringing back investment and significantly lowering unemployment.