The late-night compromise spared the battered European Union the risk of another Greek crisis this year, less than 12 months after Athens was on the brink of ejection from the currency area by rejecting austerity measures and defaulting on an IMF loan.
After talks that lasted into early Wednesday, Eurogroup ministers agreed to release 10.3 billion euros ($11.5 billion) in new funds for Greece in recognition of painful fiscal reforms pushed through by Prime Minister Alexis Tsipras’s leftist-led coalition, subject to some final technical tweaks.
A bigger step forward was a deal under which the euro zone agreed Athens would receive debt relief in 2018 if necessary to meet agreed criteria on its payments burden. In the meantime, the currency area’s rescue fund was instructed to take smaller steps to smooth out Greece’s debt service path.
However, German Finance Minister Wolfgang Schaeuble avoided any immediate commitment to rescheduling Greek debt that would have required him to secure approval from a skeptical parliament in Berlin before a general election next year.
“We have no major changes to the (Greek aid) program, so there is no need for a prior vote of the Bundestag,” Schaeuble told a news conference, calling it a good result.
Despite the absence of an immediate pledge of debt relief, the International Monetary Fund agreed in principle to rejoin the euro zone in funding the bailout of Greece, subject to its board’s approval.
“We achieved a major breakthrough on Greece which enables us to enter a new phase in the Greek financial assistance program,” Eurogroup President Jeroen Dijsselbloem, the Dutch finance minister, told a 2 a.m. news conference.
“It was difficult because we are asking a lot of the Greeks, the IMF was asking a lot of us, and we were asking quite a lot of the IMF to step back in,” he said.
Financial markets welcomed the agreement. 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 Spanish, Italian and Portuguese government bonds also dropped.
“The agreement between Greece and its creditors is positive for risk sentiment and in turn peripheral bond markets,” said Rene Archetype, a derivatives market analyst at DZ Bank.
Acknowledging the “political capital” European ministers invested to reach the deal, Dijsselbloem called it a “new phase” in a six-year drama to stabilize Greece’s finances that had taken the euro zone to the brink of break-up.
Mutual trust was returning to the talks, he said.
Greece will get most of the next installment in June to redeem bonds held by the European Central Bank and repay IMF loans, as well as to clear arrears in government payments to the private sector, with the rest paid after the summer.
The ECB is expected to resume accepting Greek government paper as collateral for lending funds to Greek banks within weeks, lowering their borrowing costs, bankers said.
Athens has long complained that austerity and reform measures demanded by its international creditors since its first bailout in 2010 have only deepened its long recession.
Tsipras’s finance minister, Euclid Tsakalotos, said the cycle could now be broken. “I think there is some ground for optimism that this can be the beginning of turning Greece’s vicious circle of recession-measures-recession into one where investors have a clear runway to invest in Greece,” he told reporters as he left the Brussels meeting.
However, there was little rejoicing back home, with many Greeks unconvinced that the sacrifices they have made to stay in the euro were worth the pain.
The IMF has long insisted European governments take a hit now on the debt Greece owes them to relieve Athens of some of its burden and make its public finances more sustainable. The refusal of Germany to do that led to months of wrangling with the IMF in which Athens was a frustrated spectator.
While the Europeans did not make an unconditional promise of reducing the payments Athens must make to them, they did spell out criteria for stretching out maturities on Greece’s loans and the grace period before it has to start paying interest on them.
Greek gross financing needs show be kept below 15 percent of its annual economic output in the medium term and below 20 percent beyond that.
IMF ON BOARD
IMF European director Poul Thomsen said he believed the measures would “deliver the necessary debt relief”, though he cautioned that it was still up to the IMF board in Washington to determine whether to agree with his assessment. The extent of debt relief that would take place was still not clear, he said.
“It will deliver debt sustainability according to our standard criteria,” Thomsen said, insisting that the IMF had not eased its insistence that it would lend no more to Athens unless its European creditors ease its debt burden. “I do not see this as a weakening of the debt relief proposals,” he said.
But he acknowledged that the Fund made a big concession by agreeing that the debt relief would be decided only in 2018, rather than up-front, as the IMF initially demanded.
The easing of Greece’s debts could be achieved by various methods, including extending some repayment maturities, the euro zone agreed – not through a “haircut” reducing the amount of nominal debt.
Germany has been insistent that the IMF should take part in the bailout because of the Fund’s reputation for fiscal rigour. However, it has also resisted demands from Washington for debt relief, a move that Berlin fears would create a “moral hazard”, giving euro zone debtors an incentive to break with austerity reforms.