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In a long-awaited development, Eurozone finance ministers agreed on a debt relief package for Greece. The agreement marked an historic moment for the country as it prepares to exit its third bailout programme in August this year. It comes after the implementation of more than 450 policy actions under the European Stability Mechanism programme alone, and ends more than eight years of international bailouts, which involved more than €240bn of loans disbursed by European official creditors.

The debt relief package includes a 10-year deferral on interest and amortisation payments for the €96.6bn of European Financial Stability Facility (EFSF) loans under the second bailout programme, a large €15bn loan tranche (of which €5.5bn will be used to cover debt servicing needs) and €9.5bn to bring the total cash buffer to €24.1bn (covers sovereign funding needs for 22 months).  Also included is the receipt of profits accrued on bonds held by both the European Central Bank and other euro area central banks and the abolition of the step-up interest rate margin, as part of the enhanced post-programme surveillance that will include monitoring by the International Monetary Fund. Greece will receive semi-annual payments starting in 2018 until June 2022 as part of additional reforms.

In our view the 10-year extension on both interest and amortisation payments for the EFSF loans is a step towards securing medium-term debt sustainability. At the same time, Eurogroup commitments to review the need for additional debt relief at the end of the EFSF grace period in 2032 (thereby ensuring that gross financing needs stay between 15-20% of GDP) also sends a strong message to the investment community. Furthermore, it potentially allows the IMF to provide a favourable review on medium-term debt relief under its on-going and eagerly anticipated Article IV Consultation with Greece.

The market, having digested the complexities of the agreement, should look more kindly upon Greece. The large cash buffer covering funding needs (potentially even to the end of 2020), combined with a framework for ensuring sound fiscal policy over the medium-term, will in our view provide additional confidence to investors. Moreover, it seems apparent that potential political risks related to the electoral cycle are mitigated by official creditors’ fiscal and conditional monitoring.

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(Reporting by Petros Mylonas, Head of Southern Europe)