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In a busy week to come, representatives from the ECB, ESM and IMF returned to Athens on Tuesday to resume talks on the 4th MoU review, with the objective of reaching a Staff Level Agreement (SLA) by the 24 May Eurogroup meeting. Initial negotiations at the Euro Working Group meeting on Monday focused on prior actions, debt relief and the requirement for a precautionary credit line post the expiration of the bailout programme.

A bone of contention in recent discussions concerns debt relief measures. Germany has appeared to harden its stance recently by insisting on parliamentary approval before granting debt relief. Conversely, IMF representative Poul Thomsen reiterated the IMF view that for the Fund to participate in the programme, Greece’s debt should be considered sustainable, implying generous debt relief. He added that for IMF inclusion in the programme before its expiration in August, debt relief measures must be agreed by the 24 June Eurogroup. In this way Greece continues to suffer on a macro level in a similar way to its domestic maladies: just as the systemic banks need to push harder for debt restructuring measures on SME loans, supranational lenders are similarly disjointed in their approach.

Greece’s post-bailout era continues to be characterised by two approaches: either relying on the market to impose fiscal discipline (though premised on a sizeable €20bn cash buffer covering the country’s funding needs until early 2020), and/or the country’s creditors working to maintain some form of conditionality after the bailout. Notwithstanding, recent positive Greek bank stress test results, combined with the expected successful conclusion of the 4th MoU review, should provide adequate conditions for lifting capital controls entirely in the medium term. This should ensure that Greece remains on a path to recovery after August this year. Furthermore, adding conditions to debt relief on strict ex-ante compliance sets a positive tone.

Our view is that the market will respond positively to the achievement of a SLA at the 24 May Eurogroup. Debt relief, combined with post-bailout surveillance, expected rating upgrades and further tapping of capital markets will send a strong message that Greece is back from the brink.

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(Reporting by Petros Mylonas, Head of Southern Europe)