Greece: Disbursement in sight, after minor amendments - ING

Paolo Pizzoli, Senior Economist at ING, suggests that Greece’s has made progress on the debt relief plan, where anticipation of implementation of short term measures might help convincing the IMF to stay on board.

Key Quotes

“The last developments of the Greek saga have met expectations. Lenders have clearly preferred to split the problem in two, separating the completion of the first review of the third programme, and the relevant disbursement of funds, from the qualification of the next form of debt relief.

As expected, parliamentary approval of the second set of measures, worth 1% of GDP, turned out to be decisive in convincing lenders to proceed towards the conclusion of the first review of the third programme.

With virtually all prior actions accomplished by the Greek side, it was no surprise to see yesterday’s Eurogroup to give its green light in principle to the completion of the first review of the third programme and, as a consequence, to the disbursement of the second tranche. The latter, planned at €5bn at the programme’s onset, is now being beefed up to some €10.3bn, to accommodate both short term debt servicing needs and the partial clearing of domestic arrears.

Where expectations were less upbeat was of the debt relief front. Here too some progress was made with the aim of keeping on bringing the IMF on board in the third programme. The sequential framework as sketched on 9 May was confirmed yesterday night.

A first set of short-term debt relief measures will start to be implemented after the closure of the first review and until the end of the programme.

Medium-run measures will be eventually conceded following the successful implementation of the ESM programme if a new debt sustainability analysis will highlight the need of further action to meet the gross financing need benchmark.

In the long term, should the previous measures prove in sufficient to bring Greek public debt back on a sustainable path, a contingency mechanism would come into action subject to a decision of the Eurogroup confirming that Greece complies with the requirements of the SGP. This could involve further EFSF reprofiling and capping and deferral of interest payments.

Will this be enough to bring the IMF on board? This is uncertain, but yesterday’s developments give some optimism.

All in all, yesterday night’s Eurogroup was certainly constructive and provided a good injection of short-term comfort. With one month until the Brexit referendum in the UK, the EU partners have almost certainly managed to neutralize the short-term default risk for Greece.”