The decision reached on Wednesday by Eurozone finance ministers to start debt relief for Athens is a sigh of relief for Greeks who have been reeling under austerity measures. The deal will see unlocking of 10.3 billion euros ($12 billion) in bailout cash. The pact also met the condition of the International Monetary Fund (IMF), which stipulated that easing of Greece’s huge debt burden was a condition for its continued participation in the bailout programme. The position of IMF has softened the stance of Germany, which opposed giving Athens more favours.
This breakthrough comes after the Greek lawmakers passed a round of spending cuts and tax hikes demanded by its creditors.
Following the news, Greece’s 10-year government bond yield fell to a six-month low of 7.09 percent and 2-year yields slid below 7 percent. Yields on government bonds issued by Spain, Italy and Portugal also dropped as Greece’s progress boosted investors’ willingness to buy other riskier assets.
Greece urgently needs bailout money to repay big loans to the European Central Bank (ECB) and IMF in July, and has already defaulted in paying for everyday government duties and wages. The country’s creditors would pay a first 7.5 billion euros tranche in June and the rest in a series of later disbursements.
Eurogroup chief and Dutch Finance Minister Jeroen Dijsselbloem said the ministers had achieved a “major breakthrough”. “This is an important moment in the long Greek programme, an important moment for all of us, since last summer when we had a major crisis of confidence between us,” Dijsselbloem added.
IMF European Director Poul Thomsen said the lender had made “concessions” but said that it would take part in the programme “provided that the debt sustainability measures make the debt sustainable”.
Germany also firmly wanted the pro-reform IMF to remain in the bailout and Berlin will have to cede ground on debt relief to achieve that.
Some questions remain over details of the debt relief: whether it will satisfy the IMF, and whether Greece can ever exit its financial crisis while sticking to the tough terms of its bailout.
Indeed, the Eurozone finance ministers and IMF showed great flexibility, especially after Athens approved more structural measures to revive its economy and pay loan installments. Options of the accord include reducing interest rates, extending loan maturities, easing repayment profiles and returning profits to Greece from the ECB’s Securities Market Programme.
There are factors that expedited reaching of the deal. Greek Prime Minister Alexis Tsipras did a great job to finally accommodate demands for extra austerity. Though he had been dragging his feet due to resistance against the
reforms in Greece, it would be unwise to let him down.
Moreover, Europe is keen not to fuel growing euroscepticism in the UK before its June 23 referendum. The Eurozone finance ministers lined up behind a package that avoids a repeat of last summer’s drama in which Greece was pushed to the brink of a euro exit. By reaching the deal to bail out Athens from its economic crisis, EU sends an unequivocal solidarity message to the UK voters that the bloc cares for its members in time of need.
With the deal at hand and in light of the Greece’s structural reforms, Athens stands a chance of reversing the vicious circle of recession-measures-recession.
When Athens start to receive bailout funds in July to redeem bonds held by the European Central Bank and repay IMF loans, as well as starting to clear arrears in government payments to the private sector, the Greeks who oppose the reforms will feel the dividends of the deal.
Brussels and IMF have shown great understanding to Greece’s situation. By working together with Athens, they will help it repay huge debt and return to the path of recovery.