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22nd Feb 2020

Eurozone agrees to Greek bail-out, but doubts remain

  • Greek finance minister Venizelos (l) talking to ECB chief Draghi (r) (Photo: Council of European Union)

After a 14-hour meeting eurozone finance ministers and bankers have agreed on a second bail-out package for Greece with extra supervision and an "absolute priority" on paying back its debts. But doubts remain on whether the country will avoid default.

"We have reached a far-reaching agreement on the new Greek programme with a very significant debt reduction. This will give Greece the time needed to follow a credible path of structural reforms and restore growth," Eurogroup chief Jean-Claude Juncker said at the end of the marathon meeting early Tuesday morning (21 February).

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The deal comprises loans to the tune of €130bn mainly from the eurozone bail-out fund (EFSF) - with a "significant contribution" from the International Monetary Fund to be decided in March. Following negotiations with bankers from the International Institute of Finance, Athens on Wednesday is set to launch a bond-swap offer for banks to take a 53.5 percent loss on their old Greek bonds.

If this 'haircut' proves successful and all the structural reforms are implemented, eurozone ministers expect Greece's debt to be slashed from 160 percent to 120.5 percent of its gross domestic product by 2020. To achieve this target, extra help will come from national central banks foregoing their profits on Greek bonds and by lowering the interest rates on the first bail-out.

As for Greece, "further major efforts" are expected to meet the "ambitious, but realistic fiscal consolidation targets", under extra supervision by the EU commission and member states, the final statement of eurozone ministers reads. A special account, sealed off to Greek authorities, will be set up especially to guarantee that Greece pays back its debt. The Greek government also pledged to introduce a legal provision ensuring "absolute priority" to debt repayments, Juncker said.

However, a leaked EU-IMF analysis of Greece's debt developments in the coming years questions the feasibility of this programme.

"The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned in the baseline (scenario)," the document reads, citing problems in convincing trade unions in accepting further "wage flexibility" and resistance from "vested interests" in going ahead with market liberalisation.

Recession, an inefficient bureaucracy and high unemployment are also mentioned in the worst case scenario, which warns that Greece would have "even less certain prospects" of returning to markets in the next years.

"The debt trajectory is extremely sensitive to program delays, suggesting that the program could be accident prone, and calling into question sustainability," it says.

Asked about this analysis, IMF chief Christine Lagarde admitted that the new Greek programme "is not an easy one" and still bears "downside risks." But she insisted that it could be done by focusing on the implementation of structural reforms and guaranteeing the political support of coalition leaders.

Economists were sceptical this would work. “The Greek programme remains fragile and vulnerable. Based on what we have seen today, Greece will almost certainly need another bailout," Sony Kapoor from Re-Define, a think tank, said in an emailed statement.

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Greek deal rests on appetite for more austerity

Eurozone countries have been quick to congratulate themselves for greenlighting a second bailout for Greece, but the deal is dependent on a wholesale change to Greek society, while the rewards in terms of economic growth and employment are far off.

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