There are growing signs that the Greek negotiations are stalling and that a deal could not be reached this week. A deal would provide Greece with all or part of the frozen funds of the Fifth Review (€7.2bn) and probably include an extension of the current programme (from end-June to end-September). As explained by Eurogroup President Jeroen Dijsselbloem officially on 11 May, the first step is an agreement at the staff level which would trigger a special Eurogroup meeting. A key question regards the potential involvement of the IMF. Press reports after the European Council in Riga suggest that Chancellor Merkel and President Hollande indicated to Greek PM Tsipras that the IMF involvement is required. That sets the bar high for a deal before the end of May. Indeed, the IMF status requires that before any release of financial support,
- 1) Greece be able to meets it financial obligations for the next 12 months
- 2) Greece public debt becomes sustainable.
The latter point means that euro area policymakers would have to consider some form of debt relief, which seems unrealistic in the near term. Moreover, the IMF is less flexible than the euro-area policymakers on the reform efforts, notably on pension and labour market reforms.Before these pieces of news, the hope was that the Eurogroup would allow a partial disbursement area (€1.8bn from the EFSF, €1.8bn from ECB profits on the Greek bonds purchased under the SMP programme, and possibly additional profits the ECB will get once Greece reimburses the bonds held by the ECB this summer). Such partial payout could help Greece avoid default on the IMF and the ECB over the summer. Even with a partial disbursement, the risk of default will remain significant over the coming months, given the deterioration in the economic and fiscal outlook. The next important payment is scheduled on 5 June (€350mln to the IMF). Even in the best case scenario of a full payout, Greece would still require a third Economic Adjustment Programme. This new bailout (that would include some form of debt relief) would need to be large, at €60-80bn, says Societe Generale.
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