International lenders asked Greece yesterday to prepare a package of additional savings measures which would be passed into law now but implemented only if needed, to make sure the country reaches agreed fiscal targets.
Once agreed, the set of contingent reforms, together with measures already under negotiation, would enable the disbursement of new loans to Athens and pave the way for debt relief.
The idea of a contingency package appears to end a long dispute between the eurozone and the International Monetary Fund over whether Greece’s current reforms are enough.
“We came to the conclusion that the policy package should include a contingent package of additional measures that would be implemented only if necessary to reach the primary surplus target for 2018,” the chairman of eurozone finance ministers Jeroen Dijsselbloem told a news conference in Amsterdam after the ministers met.
The contingency measures needed to be “credible, legislated up-front, automatic and based on objective factors.”
Greek Finance Minister Euclid Tsakalotos said Athens could not legislate “contingent measures” as Greek law did not allow it. But Dijsselbloem said a way would be found. “We need to work on how that mechanism is going to look like. Of course if there are legal constraints we can’t and won’t break legal constraints. We will design it in a way that delivers credibility ...and (is) legally possible,” Dijsselbloem told a news conference.
The contingency package is to produce savings of 2% of GDP, on top of savings of 3% that are to come from reforms under negotiation now, Dijsselbloem said.
The amount is the difference between eurozone and IMF forecasts of what primary surplus Greece is likely to achieve in 2018. The current reforms include a pension and income tax reform, the setting up of a privatisation fund and a scheme to deal with bad loans. The content of the contingency set is not decided yet.
Agreement on both reform packages – the regular and the contingent one – would mean eurozone ministers would meet again on Thursday to approve the deal and have a “serious discussion” on debt relief for Greece.
The prospect of debt talks may encourage Athens to back the new package, and lenders reminded their Greek counterparts that there are time constraints.
“The liquidity situation is becoming tight, there are debt service payments ... there is a risk that the government may have to accumulate domestic arrears again,” the head of the eurozone bailout fund Klaus Regling said.
Talks on how to design debt relief will now start in parallel with the discussions on the reforms, Dijsselbloem said.
The IMF is insisting on debt relief from euro zone governments because it does not believe Greece can maintain a targeted primary surplus of 3.5% for decades and debt reprofiling is the only way to make it sustainable. Greek debt stood at 177% of GDP last year.
Germany and several other countries believe that with proper reforms Greece can keep such a surplus for decades and point to the fact that the country does not need to service its debt for the next seven years. The Fund says this is unrealistic, and therefore the euro zone must grant the country debt relief.
Wary of German sensibility on the debt relief issue, Lagarde appeared to offer a compromise yesterday.
“The debt sustainability analysis (DSA) ...will guide us towards a mechanism that will not require any haircut, but will probably require a reprofiling of the debt using multiple mechanisms,” Lagarde said.
“But this would be triggered when needed, that is upon the completion of all measures that are being discussed at the moment and based on realistic forecasts.”
German Finance Minister Wolfgang Schaeuble said debt relief talks were not a priority. “What is in the foreground is what has been agreed last year must be implemented,” he said.