Saturday, February 21, 2015

Progress - of sorts - on Greece

An agreement has been reached between the new Greek government and the Euro zone bailout troika (the International Monetary Fund, The European Central Bank and the European Commission) that will, pending resolution of some still critical and potentially problematic conditions, extend the country's bailout for four months.  

Critically this agreement will see Greece through its end-of-February funding requirements that would, if not met, have precipitated the country's potentially messy exit from the euro zone.

But there are still significant challenges to be met, not the least of which is the requirement for Greece to provide a list of reforms it proposes to enact in order to successfully complete the current bailout agreement.  

That list of proposed reforms must be provided to the troika on Monday their review.  If acceptable the next step will be ratification by Euro zone member countries which must be completed by the end of April.  The Greek Parliament must then enact the reforms - itself challenging given the promises the new Prime Minister has made about renegotiating the bailout agreement.  

At the end of June the troika will review the Government's progress on enacting reforms which if completed successfully will unlock the next disbursement of bailout funding.

There are two key challenges in what has been laid out in the bailout extension agreement.  The first is the immediate challenge of providing a list of reforms on Monday to the troika that they are prepared to agree too.  Once that is agreed I think the member state ratification process will go relatively smoothly.

The second challenge will be getting new reforms through the Greek Parliament.  Prime Minister Tsipras was elected on promises to renegotiate the bailout agreement and to cut Greek debt levels - neither of which he has achieved.

What he has achieved is an agreement to draw down on the projected 2015 primary budget surplus on the acknowledgment of poor domestic economic conditions.  This will enable Greece to enact some of its promises to alleviate some of the high social cost of austerity.  As I said here in January, the requirement for the Greek Government to run large primary surpluses ignored the political reality of high unemployment and reduced quality of life.    

So we have a way forward, but there are still challenges.  Suffice to say it appears likely Greece will remain in the news for a while yet.