Greece just made a 'major breakthrough' in solving its debt crisis

Euro zone governments on Wednesday offered Greece debt relief in 2018, but left key details for later in a bid to bridge Germany's view that no immediate action was needed and the International Monetary Fund's call for decisions now.

The late-night compromise spared the battered European Union the risk of another Greek crisis this year, less than 12 months after Athens was on the brink of ejection from the currency area by rejecting austerity measures and defaulting on an IMF loan.

After talks that lasted into early Wednesday, Eurogroup ministers agreed to release 10.3 billion euros ($11.5 billion) in new funds for Greece in recognition of painful fiscal reforms pushed through by Prime Minister Alexis Tsipras's leftist-led coalition, subject to some final technical tweaks.

But the bigger step forward was the debt relief deal because it provided investors with more certainty that their money in Greece would be safe, paving the way for a return to market financing for Athens in 2018 and for foreign direct investment.

Markets received the deal with enthusiasm even though it is still highly conditional.

"The possible debt relief will be delivered at the end of the programme in mid-2018 and the scope will be determined by the Eurogroup on the basis of a revised Debt Sustainability Analysis," a statement by euro zone ministers said.

Greece's 10-year bond yield fell to a six-month low of 7.09 percent and 2-year yields slid below 7 percent. Yields on Spanish, Italian and Portuguese government bonds also dropped.

"The Eurogroup ... provided a road map on debt relief, which is credit positive as it signals a growing consensus among euro area member countries and the institutions, namely the IMF and the European Commission, on debt relief," Moody's Investors Service said in a statement.

Victory

The agreement on debt is a political victory for Athens and could bring the IMF to participate in the latest Greek bailout, so far shouldered by the euro zone alone.

It is also a major concession on the part of the IMF, which insisted on debt relief decisions up-front. The Fund will now analyse the terms agreed by euro ministers to see if they would guarantee long-term Greek debt sustainability.

If they do, the IMF's management will recommend to its board by the end of the year to join the Greek bailout. There was no discussion at the meeting of the possible length of the new IMF programme for Greece or its size, officials said.

The vague wording of the debt agreement, however, was key for Germany, which holds general elections next year and where financial help for Greece is a highly controversial issue.

"We have no major changes to the (Greek) programme, so there is no need for a prior vote of the Bundestag," German Finance Minister Wolfgang Schaeuble said, calling it a good result.

Acknowledging the "political capital" European ministers invested to reach the deal, Dijsselbloem called it a "new phase" in a six-year drama to stabilise Greece's finances that had taken the euro zone to the brink of break-up.

Mutual trust was returning to the talks, he said.

Greek optimism

Greece will get most of the next instalment in June to redeem bonds held by the European Central Bank and repay IMF loans, as well as to clear arrears in government payments to the private sector, with the rest paid after the summer.

The ECB is expected to resume accepting Greek government paper as collateral for lending funds to Greek banks within weeks, lowering their borrowing costs, bankers said.

Athens has long complained that austerity and reform measures demanded by its international creditors since its first bailout in 2010 have only deepened its long recession.

Tsipras's finance minister, Euclid Tsakalotos, said the cycle could now be broken. But there was little rejoicing back home, with many Greeks unconvinced that the sacrifices they have made to stay in the euro were worth the pain.

Apart from the timing of the debt relief decision, the main difference between the euro zone and the IMF was their forecasts of Greece's ability to repay debt over the next 12 years.

The euro zone believes that Greece will be able to reach a primary surplus of 3.5 percent of GDP in 2018 and keep it at that level for a decade.

The IMF says such high primary surplus levels are highly unlikely to be maintained for so long and that given Greece's track record of reform implementation, a 1.5 percent surplus from 2018 onwards was already an ambitious assumption.

Moody's rating agency seemed to side with the IMF.

"We consider implementation risks in Greece to remain high, given the small governing majority, weak institutions, and the backdrop of political and social discontent," Moody's said.

While euro zone ministers did not make an unconditional promise of debt relief, they spelled out criteria for stretching out maturities on Greece's loans and the grace period before it has to start paying interest on them.

They agreed that Greek gross financing needs should be kept below 15 percent of its annual economic output in the medium term and below 20 percent beyond that.

IMF European director Poul Thomsen said he believed the yet to be specified measures would deliver the necessary relief.

"It will deliver debt sustainability according to our standard criteria," Thomsen said, insisting that the IMF had not eased its insistence that it would lend no more to Athens unless its European creditors ease its debt burden. "I do not see this as a weakening of the debt relief proposals," he said. ($1 = 0.8972 euros)