Greek bailout deal: Details, reaction and next steps
At 2am this morning, the final 'i's were being dotted and 't's being crossed on the latest stage of the multi-billion euro bailout of Greece.
It may have felt like a slog for the finance ministers gathered in Brussels, but they have long memories, and the events of last summer – endless nights, referendums, broken promises and shattered trust – are still fierce.
The deal
The "full staff-level agreement" unlocks a €10.3bn tranche of loans needed to cover upcoming repayments and paves the way for a major debt relief agreement starting in 2018.
Under previous agreements, Greece is required to run a 3.5 per cent primary budget surplus later this decade and the creditors said steps taken by Greece in recent weeks – spending cuts and tax rises – show it is working hard to get there.
Read more: Every bit of Greece's €300bn debt pile
In this new deal, the institutions not only unlocked the package of loans, but established a debt sustainability framework which will keep Greece's gross financing needs to below 15 per cent of GDP and introduce some minor measures to make the most immediate repayments a little easier.
After 2018, the institutions committed to discussing concrete proposals on more substantial debt relief by extending debt maturities, repaying the profits they make and reprofiling some of the more expensive debt – the so-called "road map". Numbers and details, however, were lacking and Greece's debt-to-GDP ratio is above 180 per cent.
The markets
Bond markets have borne the brunt of the Greek back-and-forth, with the latest deal being no different. Investors piled back into Greece's sovereign debt, pushing the yields on 10-year bonds below seven per cent for a moment or two – seen as a key benchmark of the creditworthiness of a borrower.
At the height of the first bailout saga in 2020, yields hit 44 per cent, while last summer they peaked at 19 per cent.
Ratings agency Moody's said the deal was "credit positive, as it signals a growing consensus among Eurozone members and the institutions, namely the IMF and the European Commission, on debt relief."
European shares welcomed the news – up across the board. The climb in Athens was modest, the composite index was up by 0.8 per cent on the day, as bonds took the headlines.
The analysis: The deal
The Greek government heralded the deal as an important step on the road of recovery. Analysts said the deal was a far cry from the acrimony that last summer's discussions descended into, in a sign of greater collaboration between the Yanis Varoufakis-less Greek administration and a Eurozone more aware of how unsustainble Greek debt it.
Others, however, said the wranglings showed the power of German finance minister Wolfgang Schauble, questioned the IMF's credibility, and was the bare minimum required just to get Greece through until the next crisis erupts.
So for all of IMF's bluster that Greece debt relief should be upfront and unconditional, can has been kicked until 2018.
— Michael Hewson 🇬🇧 (@mhewson_MCH) May 25, 2016
"It was an opportunity to find a more lasting solution [but] politics has trumped it – they would much rather deal with this later than now" said Raoul Ruparel, co-director of think tank Open Europe.
"There is only so long that politics can keep on trumping economics," he added.
The Centre for Economics and Business Research (CEBR) agreed. "A politically better, but economically worse, solution to Greece's unsustainable debt … a step in the right direction, it does not go far enough." is how its analysts branded the deal.
https://twitter.com/SpiegelPeter/status/735367238610472961
"The good news about today's deal is that it helps avoid the worst case scenario … [but] without substantial debt reprofiling," the CEBR said, "we consider the debt to be unsustainable."
Vicky Pryce, an economist, added: "It is a relief that the money is coming through, we don't want another Greek crisis. They've done something for the interim, and it opens up the possibility of Greece joining quantitative easing as yields are now coming down."
Read more: It's not all Brexit at the IMF
"If I were to do the plan for Greece I would be more lenient on fiscal measures and more aggressive on debt relief", Pryce added.
Former Greek finance minister, Yanis Varoufakis said it was another "extend-and-pretend" deal.
New supercharged, mututally-reinforcing austerity/recession & no debt relief – another extend-and-pretend Eurogroup https://t.co/6Qgy8CFOLD
— Yanis Varoufakis (@yanisvaroufakis) May 25, 2016
The analysis: The politics
It may have only taken one night, but the politics behind this deal were as evident as they ever have been in the Greek debt crisis.
Analysts lined up to say that, once again, Germany had proved its might and won concessions not only from the rest of the Eurozone, but also the IMF.
"They don't want to take this decision before the German and French elections," Ruparel told City A.M.
Greece: State of the nation
| GDP growth | minus 0.3 per cent |
| Unemployment rate | 24.7 per cent |
| Inflation rate | minus 0.3 per cent |
| Gross public debt | 182.8 per cent of GDP |
Source: European Commission, May 2016
"Schaeuble is probably the one participant in the Eurogroup that completely achieved his objective," Yiannis Mouzakis wrote for Macropolis. "His only concession is that he had to compromise on his initial stance that Greece's debt does not need to be discussed before 2023."
Pryce argued, however, that the hard-line Germany was partly an act. "Merkel and Schaeuble have always played this 'good-cop-bad-cop' thing," she told City A.M. "From here on, however, IMF involvement in any deal is absolutely crucial."
However, with the IMF "capitulating" on its calls for unconditional debt relief – in Ruparel's words – and the Eurogroup refusing to push ahead with any deal without their involvement, the Fund's credibility is looking a little shaky.
The analysis: What next?
A "return to normality" was the theme of the day from commentators. For those in the "kicking the can down the road" camp, this deal prevents such a move, by just extending the need for a real discussion and keeping the cloud of an eye-wateringly high debt burden above the Greek economy. For its backers, however, this is the first step towards recovery.
Falling bond yields suggest Greece may be able to come good on its intent to return to the capital markets. It could also, quite soon perhaps, become part of the ECB's bond-buying quantitative easing programme.
With reports suggesting demand from the ECB for €80bn a month of government and corporate bonds is outstripping supply, the ECB is meeting next week and could agree to start accepting Greek debt as part of its regular auctions of cash – the first step towards "normality" for Greece's battered banking sector.
"This is an important moment in the long Greek programme," said the man at the very centre, Eurogroup president Jeroen Dijsselbloem, "an important moment for all of us since last summer when we had a major crisis of confidence between us, [now] that confidence has begun to recover."