Eurozone finance ministers and the International Monetary Fund came together Wednesday on an arrangement that paves the way for a new loan-schedule for Greece and sets out how the country could get debt relief in the future.
After an 11-hour meeting in Brussels, the Euro zone governments agreed that Athens had done all it could to repay the next portion of financial aid and that a new set of payouts could save the country from defaulting on large debt redemptions to the IMF and European Central Bank scheduled for July.
All 19 Eurozone countries are required to sign off on the new deal in order for Greece to receive €10.3 billion ($11.48 billion) in fresh loans, starting with a €7.5 billion installment in the second half of June.
The arrangement for easing Greece’s mountain of debt that was reached on Wednesday requires concessions on both sides of the negotiations. The key parties will have to give up some of their past requirements and move ahead with other demands while Greece will have to adopt more austerity moves than it had agreed upon last summer.
Germany had to promise to take additional measures to ease Greece’s payment burden and avoided any other immediate commitment before next year’s general election. The IMF agreed in principle to rejoin the Euro zone in funding the bailout subject to its board’s approval and insisted that the most important debt-relief measures wouldn’t be enacted until at least 2018 when Greece’s current bailout deal ends.
After the talks, the Eurogroup ministers agreed to release the new funds to Greece in recognition of the painful fiscal reforms pushed through by Prime Minister Alexis Tsipras's leftist-led coalition. The agreement is a political victory for Athens and could draw in the IMF to participate in the current bailout which has been paid until now by the euro zone alone. It is, in fact, a major IMF concession and will require the Fund to substantially analyze the terms agreed upon to ensure long-term Greek sustainability.
Although the deal is still highly conditional, investors took a sigh of relief from it as it offered them more certainty that their money in Greece would not be at risk. The markets also reacted enthusiastically. Greece's 10-year 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 were also down.
Athens can expect to receive its next instalment of the bonds held by the European Central Bank in June and will have to start repaying IMF loans. The ECB should resume accepting Greek government paper as collateral for lending funds to Greek banks within weeks, lowering their borrowing costs.
According to Greek Finance Minister Euclid Tsakalotos, Athens has complained often that the reform and austerity measures required of it since the first bailout in 2010 have only exacerbated its recession. He looks forward now to breaking the cycle of recession-measures-recession into one where investors can invest in Greece without having to worry about risking their money.