- The euro zone granted fresh debt relief measures to Greece last week after years of long arguments over the issue.
- Both Europe and Greece have claimed victory over the debt deal.
- Analysts argue that Greek bonds continue to be the most likely to suffer first during market shocks.
The euro zone granted fresh debt relief measures to Greece last week after years of long arguments over the issue.
Analysts told CNBC the deal was “very satisfactory” and a “win” for Greece, which has demanded such concessions since 2015.
Greece has been relying on external help in the form of loans to stay afloat since 2010. It’s now due to put an end to that on August 20. This is a critical moment for Greece and the European Union given that at the height of the Greek crisis there were questions if it would break away from the euro area and, thus, lead to the collapse of the entire euro zone.
Greece first stepped into economic trouble in 2010, due to high levels of debt, and requested help from Europe and the International Monetary Fund (IMF). That program wasn’t enough to rescue its economy and it got a second bailout program in 2012. Despite some signs of recovery in 2014, a new election in January of 2015 brought a new government that could not come to terms with creditors about the reforms the previous executive had promised. As a result, the country ran out of money and missed debt payments to the IMF. A third program (the one ending this summer) had to be agreed to prevent a bank run.
In eight years of bailout programs, Greece has received 241.6 billion euros ($281.92 billion). This has caused Greek debt to rise and it needs to be repaid at some stage.
Greece’s public debt stands currently at about 180 percent of debt-to-GDP.
In order to make debt repayments easier for Greece, the euro zone agreed last Friday to a new set of measures.
Under the agreement, Greece doesn’t have to pay any of its money until 2032 - which represents a 10-year extension in the maturities of its debt.
Currently, the European Central Bank (ECB) and other central banks are buying bonds from euro zone countries as part of economic stimulus measures. The latest debt relief measures state that any profits made by central banks in the euro zone on Greek bonds will be returned to Athens in two equal tranches every year, between 2018 and 2022.
The 19 euro zone finance ministers, who met last week, also agreed to look at Greek debt again in 2032 and assess whether or not further measures are needed to make the debt pile sustainable.
Thanks to this set of measures, Greek debt repayments are no longer a problem in the medium-term, according to the International Monetary Fund (IMF), which was the biggest advocate for Greek debt relief. But in the long-run the IMF has its doubts.
"There is no doubt in our mind that Greece will be in a position to re-access financial markets, and certainly for the medium-term we are very comfortable," Christine Lagarde, the IMF’s managing director told reporters in Luxembourg, on Friday morning.
"As far as the long term is concerned, we have reservations," she said, although she added that she also took note of the commitment made by European partners to look at Greek debt repayments again in the future — a commitment that, according to Lagarde, has always been honored every time it is put forward.
For the first time in nearly a decade, Greece can claim the crisis is gone and that it will be standing on its own feet after August. With the end of the bailout, Greece will no longer have to implement reforms demanded by creditors in exchange for funds.
The agreement on debt is particularly important for Prime Minister Alexis Tsipras, who promised to the Greek people, back in 2015, that he would get debt forgiveness from European creditors. Though the agreement doesn’t give Tsipras the nominal haircut that he might have liked, it totally removed any big concerns over debt repayments in the short to medium-term. Tsipras promised in 2015 he would not wear a tie until creditors would "cut" the Greek debt. He wore on for the first time on Friday.
European officials have also claimed that Friday’s deal was a turning point and the end of the Greek crisis. Greece was the Achilles heel of Europe, being the last country still under economic help in the wake of the sovereign debt crisis. The EU has been desperate to claim the job was done and that the euro zone economy was out of the woods.
The yield on the 10-year Greek bond has dropped nearly 40 basis points since the agreement was reached on Friday morning. It stood at 4.152 at the start of European trading on Monday.
“This deal delivers at the higher end of expectations, and will be considered a win by Greece and the markets,” Mujtaba Rahman, managing director at Eurasia Group told CNBC over email.
He explained that going into the meeting on Thursday expectations were that the maturities would be extended in the lower end of the 5-10 year range. But in the end the ministers approved a 10-year extension.
“Focusing on the debt side, this is seen as a very satisfactory deal for Greece since it builds a backstop against any risks over the short term; it ensures market credibility over the medium-to-longer term; and it gives breathing space for the economy to perform,” Axia Ventures said in a note Friday.
However, the Greek government will have to keep the reform path on track to attract investments for the long-run. One of the biggest economic issues – the level of bad loans in the banking system – is still a problem for certain money managers.
Maartje Wijffelaars, senior economist at Rabobank told CNBC Monday that the risk that Greece goes on a spending spree or reverses reforms after the current program is limited as current and future debt relief is tied to prudent fiscal and economic policy. However, “ the risk that at some point the Greek (people) are ultimately fed up with all the conditions, ongoing weak labour market conditions and household finances remains present, which could lead to new clashes with Europe down the line.”
She also warned that “Greek government bonds likely (will) remain among the first hit in case market stress returns due to, for example, rising uncertainty over the future of the euro zone or a worsening global/euro zone growth outlook. Let alone if Greece’s economy underperforms current expectations or enters a recession.”
Greek bonds saw signs of distress in February during a market correction and at the end of May due to political turmoil in Europe.