May 2, 2017

Greece has wrapped up a deal with creditors on details of reforms that must be enacted before the country can receive the next disbursement from its €86bn bailout programme.

The deal, which covers a wide range of fiscal and structural measures, from fresh cuts in pensions to liberalising Sunday trading, was completed during intensive talks over the past week after months of wrangling between Greek finance ministry officials and bailout monitors from the EU and the International Monetary Fund.

It follows a political deal last month that allowed bailout monitors to return to Athens to hammer out details of the measures, after Greek prime minister Alexis Tsipras lifted objections to legislating on further pension cuts and a broadening of the tax base. The measures would come into effect in 2019 and 2020.

Differences over the size of cuts to be applied in 2019, on pensions already reduced by more than 40 per cent since 2011, held up an agreement, according to people involved in the negotiations. The further pension reduction was agreed at 18 per cent.

“There is white smoke . . . the negotiation is finished with agreement on all the issues,” said Euclid Tsakalotos, the Greek finance minister, after all-night talks.

The European Stability Mechanism, the eurozone bailout fund, said in a statement on Tuesday that the preliminary agreement would be complemented “by further discussions in the coming weeks on a credible strategy for ensuring that Greece’s debt is sustainable”.

“Staff teams from the European Commission, ESM, European Central Bank and the IMF have reached a preliminary agreement with the Greek authorities on a policy package to support the recovery in Greece, and which will be the basis for concluding the second review of the ESM stability support programme,” the ESM said. It added: “The Greek authorities have confirmed their intention to swiftly implement this policy package.”

The yields on Greek sovereign debt fell on Tuesday as capital market investors welcomed news of the deal and bought into the country’s debt.

The yield on two-year paper — which tends to be more sensitive to policy detail and declines when prices rise — fell 30 basis points to 6.11 per cent. Ten-year bond yields were at 6.23 per cent, down 17bp.

Greece’s parliament must now approve the reforms, opening the way for the eurozone finance ministers to sign off on the agreement at a meeting on May 22.

The ruling leftwing Syriza party and its rightwing coalition partner Independent Greeks hold a slim three-seat majority in parliament.

But with opinion polls giving the opposition centre-right New Democracy a double-digit lead, coalition lawmakers are expected to back the measures unanimously rather than trigger a snap election by rebelling against more austerity.

Greece urgently needs the next bailout payment to meet deadlines in July for repaying more than €6bn of debt.

The agreement is also a condition for securing the participation of the IMF as a financial partner in the current bailout in line with a requirement by Germany, the leading European contributor to three successive Greek rescue programmes since 2010.

The fund insists that Greece be granted debt relief before it can join the bailout, claiming the country’s huge debt burden is unsustainable, while Berlin rules out a “haircut” of Greek debt, setting the stage for a tricky political negotiation.

One Greek official said the agreement did not include precise figures on targets for the primary budget surplus — before making payments of interest and principal on the country’s debt — as these would be finalised during talks on the extent of debt relief to be granted by the creditors.

Greece achieved an unprecedented primary surplus of 3.9 per cent of gross domestic product in 2016 against a target of 0.5 per cent. But the fund doubts that the EU’s target for Greece of a 3.5 per cent primary surplus could be maintained over the medium term.

Additional reporting by Michael Hunter

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