No Grexit for Now, But Greece’s Last Minute Agreement Could Easily Unravel

  • The agreement reached by Greece and its creditors on 13 July reduces near- term risks around a Greek exit from the euro, but they remain high. Greece made all the concessions, but more to come as this only opens door to European Stability Mechanism (ESM) negotiations.
  • The language on reducing Greek debt burden is almost exactly the same as in 2012, so no big concession on the creditors’ part.
  • The biggest risk now is implementation against the background of a deepening recession.  Parliamentary processes in Greece and other countries will also be difficult. The €50 billion in asset sales called for in the agreement is not realistic.
  • The risk of a Greek bank collapse has been reduced, as the European Central Bank will likely increase the emergency liquidity assistance (ELA) limit.  We continue to consider Greece debt crisis or Grexit risks as not being a Lehman moment for Europe

Long list of measures

Following a marathon session, Greece and its creditors finally reached a deal on 13 July, which opened the door to negotiations on a three-year European Stability Mechanism (ESM) package worth between €82-86 billion.

The statement of the Euro Summit includes a long list of measures that the Greek government needs to implement.

In order to rebuild trust, the government needs to ‘legislate without delay a first set of measures’. By 15 July, the Greek government needs to implement measures to improve the VAT system as well as the pension system. It should also introduce some quasi-automatic spending cuts in case the target for the primary surplus will be missed.

The Greek statistical agency (ELSTAT) needs to get full legal independence. The civil justice system needs to be improved and the Bank Recovery and Resolution Directive should be written down into the law by 22 July.

These are only prior actions that need to be met.

Looking further forward, the list of measures is much longer, as the Greek authorities need to implement (tougher) reform measures given the worsening outlook for the economy.

The measures should include ambitious reforms of the pension system, product markets and the energy market, as well as rigorous reforms of the labor market in order to align labor market policies with international/European best practices. Furthermore, steps need to be taken to strengthen the financial sector.

The creditors have also demanded that ‘valuable’ Greek assets be transferred to an independent fund located in Greece. The assets will be monetized through privatization as well as other means (likely operational proceeds).

The target size is €50 over the life of the new loan, half of which will be used to recapitalize the banks and the rest to be used to repay debt and support investment.

Another demand is a strengthening and modernization of the public administration under the auspices of the European Commission (EC). A first proposal should be submitted by 20 July.

As implementation is key, the statement notes that it welcomes the Greek authorities submitting a request for technical assistance from the Institutions, coordinated by the EC.

Interesting in this respect is that the International Monetary Fund (IMF) will remain involved. Furthermore, the government needs to re-examine earlier adopted legislation that run counter to previous agreements. 

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