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13th Aug 2022

Greece and creditors break bailout deadlock

  • "There is a light at the end of the austerity tunnel," said EU finance commissioner Pierre Moscovici (r). (Photo: Council of the EU)

The Greek government agreed on Monday (20 February) to make new reforms to cut up to 2 percent of GDP in spending in the coming years.

Greece accepted budget cuts worth up to €3.6 billion that it had previously refused as the only way to break the deadlock with its creditors in talks to unblock a new tranche of the €86 billion bailout programme agreed in 2015.

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  • The Greek parliament will have to adopt new reforms before a new tranche of aid is unblocked. (Photo: EUobserver)

Experts from the creditor institutions - the European Commission, the European Central Bank, the European Stability Mechanism and the International Monetary Fund (IMF) - will be able to go back to Athens and prepare reforms on tax, pensions and the labour market with the Greek government.

All parties hope that a so-called staff level agreement will be reached in time for eurozone ministers to close the second review of the programme and allow a new loan disbursement at their next Eurogroup meeting on 20 March.

The ministers at a Eurogroup on Monday sugar-coated the Greek concessions by offering the prospect of unspecified "growth-enhancing measures" if the new reforms created "fiscal space" from 2019 onwards.

Eurogroup president Jeroen Dijsselbloem said the decision signalled "a shift of emphasis in the policy mix, from the austerity side, much more to structural reforms". But he gave no details of the supposed shift.

In Athens, government spokesman Dimitris Tzanakopoulos portrayed it as a “decisive victory” for Greece, because "any [austerity] measure taken will be offset by another measure of a similar amount".

He insisted that there would be "not a single euro of additional austerity”.

But the reality is more nuanced.

"There is a light at the end of the austerity tunnel," EU finance commissioner Pierre Moscovici said at a press conference after the meeting. But he insisted that reforms must be done first and that potential future growth-friendly measures should be budget neutral.

The budget cuts were needed to close the second review, while the "offset" measures could only be agreed on principle and voted later.

'To the liking of the IMF'

"The Greek government can already prepare those measures, legislate those measures if they want," Dijsselbloem told journalists. But he insisted that "all depends on the size of the reforms" that Greece will have to agree first, and whether it continues to meet the fiscal targets set by the bailout memorandum for the coming years.

"I can never promise the end of austerity," Dijsselbloem said.

The size of the new reforms, and whether they are sufficient for creditors to close the review, will also depend on the IMF, which has threatened to pull out of the bailout if reforms fail to make the Greek debt sustainable.

The Washington-based fund has been saying for months that more structural reforms were necessary in order to secure Greece's fiscal targets and reduce the cost of the debt.

Europeans and Greeks had been saying that the target - a 3.5 percent of GDP primary budget surplus "in the medium term" after 2018 - could be reached thanks to Greece's growth and budget surplus since 2015.

Last week, EU commission vice-president Valdis Dombrovskis pointed out that "the IMF has very pessimistic macroeconomic and fiscal projections. There is a gap between our figures and theirs".

Dijsselbloem admitted on Monday that "what we have agreed to now is to the liking of the IMF".

'Too early to speculate'

In a statement issued later, the IMF said that it was "too early to speculate about the prospect for reaching staff level agreement" during the forthcoming expert mission in Athens.

"More progress will be needed to bridge differences on other important issues," it said, referring to the Greek debt and what "medium term" means when it comes to setting the fiscal targets.

The question of how long Greece is required to reach a 3.5 percent surplus after the end of the programme in 2018 was left open when the bailout was agreed in 2015. But it is crucial now because the longer Greece has to meet that target, the more cuts the IMF will ask.

Europeans and IMF could agree on a three-year period.

"We want to make it so that it is more realistic," Dijsselbloem noted.

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