17 Feb 2017

Greece still pushing a Sisyphean boulder

Philip Shaw

Chief Economist

Over the last few weeks concerns over the outlook for Greece have been rising again. These concerns came to a head with the release of the IMF’s 2017 Greek Article IV publication, which highlighted ‘explosive and highly unsustainable debt’, as well as a rare difference of opinion within the IMF’s Executive Board.

Short dated Greek bonds sold off, pushing the 17th July 2017 bond yield to 13.2% (see chart 1), as investors fretted over the apparent disagreements between the creditors and Greece and the potential risk that July’s debt repayments could be missed if no agreement was reached.

State of play

In August 2015 Greece signed a third (€86bn) bailout programme with the European Stability Mechanism (ESM) (whilst it was assumed the IMF would provide new funds, at the time of writing that had not been agreed). Of the third programme €13bn was initially disbursed and a second €10.3bn tranche approved in May 2016 following the completion of the first review. However, since then the programme has effectively been ‘off-track’ with the second review, which was meant to have been completed in Q4 2016. As a result a €6.1bn payment to Greece has been delayed due to disagreements between Greece and its creditors and even between the creditors (IMF, European Commission).

There are a number of issues at the heart of the disagreements:

  • Greece threw a curveball into discussions back in December when it took unilateral action in approving a bonus pension payment and suspended a planned VAT increase on the Aegean islands. The move prompted Greece’s euro area creditors to suspend short-term debt relief measures which were agreed early December and talks were halted. Whilst talks have resumed, Greece’s unilateral fiscal policy measures, differing views on reforms (most notably in the labour market) and implementation fatigue are all weighing on talks.

  • Primary budget surplus: One major issue that has dogged discussions surrounds Greece’s medium term primary surplus targets (deficit minus interest payments). Under the current programme’s MoU (Memorandum of Understanding) Greece is expected to meet a primary surplus target of 3.5% of GDP in 2018. However the IMF has a more pessimistic outlook in assuming that under current policy the surplus will stand at only 1.5%. Greece has already legislated for contingency measures, known as ‘the cutter’, should the 3.5% 2018 target not be met. Not only that, but under the MoU Greece is also expected to achieve a 3.5% surplus for the following 10 years as well, which is where the disagreements between the creditors and accusations of overly bearish IMF forecasts have arisen. Whilst the EC has assumed Greece can meet a 3.5% primary surplus, the IMF in its latest review suggested that such a primary surplus could only be achieved with further fiscal measures.

  • On Friday 10th February there appeared to have been some convergence of views with a common proposal being put forward to Greece suggesting that the impasse could be broken if Greece were to take additional fiscal measures worth 2% of GDP (approx. €4bn); 1% to be legislated for now and a further set of measures worth 1% after 2018, if they were required. But after 7 years of austerity it remains to be seen how politically feasible this proposal would be given PM Tsipras’ previous pledge not to legislate for ‘a single euro’ worth of additional measures.

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