As a deal on a third bailout for Greece, initially due by December, remains elusive, risks are rising that talks may drag into summer when the nation faces a large debt payment.
While analysts expect a solution will eventually be found, the discussion could take months and add to volatility in European assets as uncertainty over Greece comes amid a deadlock in Spanish politics and the run-up to the UK’s vote on its membership in the European Union.
European Commission vice-president Valdis Dombrovskis said on Monday that if the Greek government takes a few steps on fiscal targets, an agreement may be only a few weeks away. At the same meeting, EU Economic Affairs Commissioner Pierre Moscovici said the continuing role of the International Monetary Fund in the aid program for Greece is “decisive.”
But the IMF has repeatedly said it won’t lend Greece more money unless the country’s liabilities become sustainable through debt relief and spending cuts. Germany is opposed to such a move, with Finance Minister Wolfgang Schaeuble telling German TV that Greece needs to do more, while repeating his view there’s no need for debt forgiveness. European Stability Mechanism Chief Executive Klaus Regling has said reforms can help Greece reach debt sustainability without any recourse to haircuts, urging the nation to also deal with the refugee crisis.
Greece, for its part, says the IMF is holding back an agreement by disputing savings forecasts and demanding further cuts. Greek Prime Minister Alexis Tsipras has said debt-relief talks are set to begin after the first program review.
Greece’s government plans to submit bills on tax and pension reform in parliament next week, even though they haven’t been approved by creditors who may consider the move to be a unilateral decision. The government is aiming to get the creditors to endorse changes to pensions, taxation and management of non-performing loans before euro-area finance ministers meet on April 22, where it’s hoped a staff-level agreement will be reached. Talks with officials from the EC, the European Central Bank, the ESM and the IMF will resume after the fund’s spring meetings in Washington. Moscovici said he will seek progress on reducing Greece’s debt burden in Washington.
Eurogroup President Jeroen Dijsselbloem says he expects political agreement on the first review of Greek bailout at April 22 meeting or, if not, at the group’s next gathering on May 24. By then, pressure will be increasing to get a deal as Greece is due to repay the IMF about €650mn ($733mn) in June and about €2.3bn to the ECB on July 20. The nation will have difficulty repaying Europe’s central bank if an agreement isn’t reached by then.
The UK referendum on EU membership on June 23 is another factor that could bring the issue to a head, according to a leaked document purporting to be a transcript of a conversation between IMF officials.
The April 22 Eurogroup is probably too soon for a debt-relief agreement but an earnest political discussion will begin, followed by a deal in May, Eurasia analyst Mujtaba Rahman writes in a client note. He expects an eventual “fudge” with the Eurogroup granting more debt relief than the EC and ECB suggest is needed, but less than what the IMF wants - with the government asked to deliver the rest in the form of additional reforms.
Standard & Poor’s analysts see a compromise on pension reform by the end of April, leading to a conclusion of the review, and say a removal of capital controls is a critical step toward restoring confidence in the country’s banking sector.
Athanasios Vamvakidis, strategist at Bank of America Merrill Lynch, expects an accord before the July payment to the ECB falls due. RBS analysts say parties will be aware of the risk of Greece headlines interfering with the so-called “Brexit” vote, so any decision could be delayed until July.
The Athens Stock Exchange is down 1.9% over the past month, underperforming the Stoxx 600 that has risen 0.5%. Greek government bonds are Europe’s worst performers over the same period.