Greece has just cleared a major hurdle, having gotten the go-ahead from the European Commission to receive 1 billion euros for debt relief. Those funds were released to Greece on Saturday. This cash is earmarked to repay their IMF loans, and comes from profits made by eurozone central banks on their holdings of Greek bonds, which are expected to slowly mature over the years. This disbursement is only the first part of a total 4.8 billion euro package, that creditors pledged to Greece until 2022 as part of the post-bailout program, but it is conditional upon continued financial reforms.
This initial disbursement was specifically contingent on a law on banks’ recovery of bad debt, intended to reduce the burden of non-performing loans on the banking sector. Greece also had to allay fears concerning their household insolvency issue, which creditors had worried could harm its ability to repay loans, and drag down the banking sector. This means Greece is one step closer to fulfilling its early repayment goals.
The money will allow Greece to repay a part its IMF loans earlier than scheduled in its current timetable, but such a move requires approval from euro-area creditors first. Doing so would allow Greece to achieve greater economic normalcy, as well as allow Prime Minister Tsipras to score political points ahead of the upcoming election, as pulling this off would signal the increased strength of the Greek economy, allowing Greece to begin relying less on its creditors, and take credit for reducing the IMF’s need for oversight. So far, the government has not submitted a formal request to the IMF to allow early repayment, as Greece is still exploring this option.
Greece exited nearly a decade of austerity last summer, and owes the IMF a total of about 12 billion euros. Greece borrowed hundreds of billions of euros during the financial crisis, and will be repaying European creditors for the next three decades. Until then, European creditors will be demanding Greece undergo financial reforms and fiscal discipline. Currently, Greek debt is 180% of its GDP.
Early repayment of IMF loans would allow Greece to bring down its total debt refinancing costs. Last summer, Greece and its creditors struck a deal, that eased repayment terms for part of the nation’s debt. Repaying the IMF early would help reduce Greece’s total debt obligations, as parts of these loans are more expensive than the bailout funds received from the eurozone – or the cost of more recent borrowing from the markets.
“We have a plan to stop having the IMF here, and soon we will carry it out,” Tsipras said last month.
However, Greece can’t go ahead without the green light from the eurozone. As creditors, the other countries must first waive their right to early repayment by a proportional amount. Though it’s not a given that they’ll grant this favour, the good news for Greece is that such waivers have been previously granted to other former bailout states, like Ireland and Portugal. Athens may need to prove that early repayment is financially beneficial for Greece, and that they wouldn’t just be replacing official debt with pricey borrowing from the markets, as well as demonstrating that Greece has additional economic reforms to unveil.
Germany is opposed to its plan to repay the IMF early, as it would consider the move an “IMF exit,” and it values IMF input on Greece’s implementation of the terms of its bailout with its international creditors. But if Greece repays the IMF, its input on Greece’s actions is much reduced.
However, Greece may be hampered by the delay in fulfilling the conditions attached to its post-bailout review, which includes the disagreement concerning how to address household insolvency. Despite the nod from the European Commission, the framework Greece has in place may yet prove insufficient. This in turn may spook creditors, who worry about an unstable housing market’s effects on Greece’s banking sector, including potentially risky behaviour ahead of the upcoming national elections.
Housing market reforms are politically sensitive, and changing foreclosure rules could hurt families that struggle with mortgages on their homes, and are fed up with austerity measures. Prime Minister Alexis Tsipras is sensitive to this, as his party is currently trailing the centre-right New Democracy party in the polls. The election is expected to held in October.
“All in all, Greece has done what was necessary to respect its commitments. The decision gives a new, very strong signal to the markets,” said EU Economics Affairs Commissioner Pierre Moscovici, after talks with ministers in Bucharest.
Bolstered by the recent go-ahead from Europe, Greece is also considering another bond sale in the near future – and due to improving liquidity, Greece may not even need the 1 billion euros at all. Yields on Greek five-year bonds have fallen to a record low, which shows an increased appetite for taking a chance on Greece. This sale could boost international investment further, as well as boost Greece’s already sizable cash buffers. This would, in turn, make it easier for Greece to borrow at more favourable rates on the market, after years of support from the EU and the IMF. Last month, Greece made bank on a 10-year bond – the first major borrowing effort since the debt crisis. In total, Greece hopes to raise about 9 billion euros in the markets to boost investor confidence.
According to IMF projections, the Greek economy is expected to reach 2.4% growth in 2019, expanding from its 2.1% growth in 2018. However, this is seen as an optimistic projection by some. Earlier in the month, the Bank of Greece warned that due to international uncertainty, and doubts over the government’s commitment to continued economic reforms, the economy was only likely to grow by 1.9%. This is well below the European Commission’s forecast of 2.2%, or the IMF’s most recent projections of 2.4%.
Central bank governor, Yannis Stournaras, notes in the central bank report that this is a setback for Tsipras and his left-wing government, especially in the face of general elections, and promises to ease austerity and address poverty.
“In the domestic environment, increased uncertainty regarding the course of post-program reforms, together with restrictions on the financing side, have an adverse effect on investment,” the central bank report said.
“Furthermore, high taxation in recent years, while halting the upward trend of the public debt, has also restrained growth momentum, [and] reduced the competitiveness of Greek businesses. It limits improving consumer and investment confidence, and is creating tax fatigue, a shrinking tax base, and exhausting the citizens’ ability to pay.”
Despite all the good news for Greece, this development may be the harbinger of a bumpy road ahead if Tsipras loses the elections. His successor may feel less bound to produce budget surpluses and continue reforming the economy than Tsipras and the Syriza party – and that may cause friction with Europe, notwithstanding Greece’s continued economic growth.