After several months of negotiations, Eurogroup finance ministers agreed on “overarching elements of policy, in terms of size, timing and sequencing of the reforms” for Greece to complete its latest review before the Summer. Under the plan, Greece will first legislate more reforms subject to staff level agreement before the Eurogroup provides debt relief beginning in Sept 2018.
The dilemma is that the Eurogroup is only offering rescheduling of debt while the IMF and the Greeks want outright debt forgiveness. Germany says haircuts violate the no-bail-out principle and can only be done if the Greeks exit from the Euro. This is not a debate policy makers want to have ahead of the German general election in September.
While Greek bonds may eventually qualify for ECB purchases if the country sticks to the new plan, without debt forgiveness and no investment grade rating, the bonds fall again out of the ECB collateral framework unless the program gets extended beyond 2018. By then, however, the appetite for yet a fourth program may be limited on all sides. While investors may be tempted to buy into the Greek government bonds in view of a comprehensive debt restructuring we believe such scenario is as of now unlikely.
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