Greece Has Just Days to Fix Things Before Its Next Cash Payment

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Greece’s foot-dragging on some key economic reforms is raising creditor concern, putting at risk a planned debt relief measure next month and a rebound in its stock and bond markets.

A report by the country’s creditors on Wednesday said that Greece has yet to fully comply with a list of 16 pending reforms, despite “considerable progress” in implementing some of them. Unless it rushes to complete them all before a meeting of euro-area finance ministers on March 11, the cash disbursement will probably be delayed, according to European Union officials.

Although Greece exited its international bailout last summer, it still needs to undertake overhauls in exchange for semi-annual disbursements of around 1 billion euros ($1.14 billion) until mid-2022, money that’s to be used by the euro area’s most-indebted nation to ease the refinancing of its burden.

The government of Prime Minister Alexis Tsipras, which faces a general election this year, has been slow to implement the agreed measures and taken some policy decisions -- including an increase in the minimum wage and proposed subsidies for mortgages -- that have spooked creditors. Questions are being raised about whether the holdups are part of reform fatigue or -- more crucially -- a political choice that spells out further fiscal profligacy.

A rap on the knuckles from the EU could have an impact on Greek markets, which have been among the strongest performers in the euro area this year. The Athens Stock Exchange General Index has risen about 13 percent since the start of 2019, while Greece now pays about 3.7 percent to borrow over 10 years compared with its peak of about 37 percent at the height of its debt crisis in 2012.

Household Insolvency

Among the issues that rankle creditors is the Greek government’s proposed legislation on the protection of homeowners’ primary residence from foreclosure, which EU officials say is too generous. The new legal framework will most likely be submitted to parliament in the coming week, with details being ironed out with Greek banks and the country’s creditors, two government officials said.

The proposal “raises serious concerns regarding its impact on the payment culture and bank balance sheets and its overall design could enable strategic defaults,” the European Commission said in its enhanced surveillance report on Greece. A large number of design and technical details need to be settled, according to the report.

Meanwhile, a decision by the Greek government to raise the minimum wage by 11 percent -- above the upper end of a range recommended by experts -- surprised creditors who saw it as a risk to competitiveness and growth. Still, the measure could have a short-term positive net fiscal impact in 2019, according to the report.

Reform areas that are lagging include the privatization of a motorway and the appointment of 69 administrative secretaries across the public sector, while the constant creation of new arrears to private suppliers is also weighing on the economy, according to the report.

The delays mean Greece has about 10 days to fulfill its commitments, failing which the planned disbursement won’t happen until later, according to the officials. While the country doesn’t face a liquidity crunch, a holdup in the disbursement could signal to investors that the country’s reform-drive is waning. This, officials said, could create difficulties to government’s plan to issue a new bond in the coming month.

©2019 Bloomberg L.P.