The preliminary agreement between Greece and its international creditors is a positive step towards unlocking funds to enable the country to meet its July debt maturities, Fitch Ratings says. It is also a prerequisite for discussions on longer-term debt relief but the eventual timing and outcome of these remains uncertain.

The Greek government and the country’s international creditors said on 2 May that they had reached a preliminary agreement on the second review of Greece’s third bailout programme. Greece has committed to further cut pensions, raise some taxes, and reform labour and energy markets. If the Greek parliament approves these measures, eurozone finance ministers could approve the release of around EUR7 billion of European Stability Mechanism (ESM) funds when they meet on 22 May. The funds will be partly used for clearance of general government arrears with the private sector as well as for covering EUR6.3 billion of debt due for repayment in July.

This would be consistent with our baseline assumption when we affirmed Greece’s ‘CCC’ sovereign rating in February. We took into account Greece’s broad programme compliance and the eurozone authorities’ desire to avoid a fresh Greek crisis. We also acknowledged that popular and political opposition in Greece to elements of the programme remains high, which create substantial implementation risk. But we think government MPs are more likely to approve the reforms than reject them.

Greece’s European creditors and the IMF said in a joint statement that talks on “a credible strategy for ensuring that Greece’s debt is sustainable” would take place “in the coming weeks”. It is not clear how close the IMF and some European creditors are to agreeing on the timing and nature of potential debt relief that could enable the IMF to join the third bailout programme as a lender. And there is now a very tight timetable for securing such agreement and completing the processes that would underpin IMF participation before July.

As we noted in February, we think Greece’s European creditors would be prepared to disburse funds without IMF involvement, partly because Greece has exceeded programme targets (the general government recorded a primary surplus of 3.7% of GDP in 2016, well above the 0.5% target). Nevertheless, a decision by the IMF not to participate could still complicate the programme review and disbursement.

While Greece has exceeded fiscal targets, the macroeconomic picture is more mixed, partly reflecting the impact of programme delays on confidence and payments to the private sector. Some data suggest that the pace of the economic recovery has slowed in 2017. General government arrears with the private sector rose to EUR5 billion at end-February, and manufacturing PMIs indicate a contraction in activity in 1Q17, although industrial production has performed well.

Source: Fitch Ratings