“There Was White Smoke”: Greece Reaches Deal With Lenders, Promising Even More Austerity

Greek government bond yields fell after Greece and its lenders said they reached a long-awaited deal on reforms required to release further bailout funds. With a promise to further cut pensions and give taxpayers fewer breaks, Greece paved the way for the disbursement of further rescue funds from international lenders and possibly opened the door to reworking its massive debt Reuters reported.

The deal was reached early on Tuesday morning, when officials from both sides said they had agreed on a package of bailout-mandated reforms, ending six months of staff-level haggling. Greek Finance Minister Euclid Tsakalotos announced it with a term associated with papal elections. “There was white smoke,” he told reporters.

As part of the reforms, Athens has promised to cut pensions in 2019 and cut the tax-free threshold in 2020 to produce savings worth 2 percent of gross domestic product. If Greece outperforms targets, it will be allowed to activate a set of measures offsetting the impact of the additional austerity, which includes mainly lowering taxes. Athens also agreed to sell coal-fired plants and coal mines equal to about 40% of its dominant power utility Public Power Corp’s capacity.

On the budgetary target level, the lenders are now likely to decide among themselves on Greece’s medium-term primary surplus targets, a key element for granting further debt relief.

In a draft document seen by Reuters, the IMF says Greece can reach a primary surplus – the budget balance excluding debt repayments – of 2.2 percent in 2018 and aim at 3.5 percent annually in 2019-2021. It suggests the primary surplus target be reduced to 1.5 percent of GDP thereafter.

Euro zone lenders, however, believe Greece must sustain a 3.5 percent GDP primary surplus target over a longer period.

Last year’s Greek primary surplus was 4.2 percent, according to the lenders. Whether that can be maintained is unclear.

Now comes the hard part, however, as Greece needs to put the new measures, which also include opening up the energy market to competition, into law before euro zone finance ministers approve the disbursement of loans, probably at the next scheduled Eurogroup meeting on May 22. Athens needs the funds urgently to repay €7.5 euros in debt maturing in July.

The Eurogroup meeting, meanwhile, may mark the first formal discussion of debt relief for Greece, an issue that means different things to each side. As has been the case for the past two years, the IMF believes that Greek debt is unsustainable at 179% of gross domestic product and is reluctant to participate in further funding without a debt relief agreement. EU lenders, on the other hand, have ruled out forgiving the debt and refused to discuss such things as cutting repayment rates until after a reform-for-cash deal is cut. Both groups of lenders have differed markedly about what Greece’s budget is capable of sustaining.

Which means that the still “deal” remains a blank check. Nonetheless, the Greek government hailed Tuesday’s agreement as now allowing the yet-to-be-defined relief go ahead. “The government believes that this road, despite the difficulties, will lead to the country’s exit from bailouts,” Interior Minister Panos Skourletis told ERT TV. “What’s important after closing the bailout review is to have a roadmap for debt relief.”

Skourletis repeated Greece’s mantra that demanding increasing amounts of austerity risks alienating great swathes of EU citizens. “The consequences for every government, including ours, that is obliged to implement bailout measures, is the risk of damaging the relationship with society, particularly the groups that you want to represent,” he said, well aware of the risks of promising more austerity and being unable to deliver.

Should the Greek population revolt at even more austerity imposed upon it, the current government may face a turbulent summer in which labor strikes once again drag down the depressed economy, potentially ushering in the New Democracy party back in power, and reseting the Greek process back to square one.