By Larry Elliott
Rating agency claims lag in talks between Athens and its creditors increases risk that Greece will miss repayments next year
Fears that Greece’s seven-year debt crisis is about to enter a troubling new phase have been voiced by one of the world’s leading rating agencies.
Moody’s said it was worried by the decision by the European authorities to suspend a debt-relief deal for Greece after the government in Athens gave a Christmas bonus to pensioners, promised free school meals for the poorest children and cancelled a VAT increase.
The rating agency said any “material delay” in concluding talks between Greece and its European creditors would make it harder for the troubled country to meet next year’s onerous financial commitments and would increase the risks of bondholders not being paid.
After months of negotiations, Europe agreed to limited debt relief to Greece earlier this month by giving Athens longer to pay and reducing the interest rate payable on its loans.
But within days the decision was put on hold by the European Stability Mechanism (ESM) – the Luxembourg-based body that provides help to countries and banks facing financial difficulties – after Alexis Tsipras’s coalition government decided to provide help to pensioners, schoolchildren and VAT payers on the Greek islands.
The plans involved spending amounting to €617m (£518m) – less than 0.5% of Greece’s GDP – but were made without consultation with the country’s creditors.
Hardliners in Brussels and in Berlin were outraged by Tsipras’s decision, seen as evidence of backsliding on a commitment made in August 2015 to keep to a tough programme of economic reforms in return for an ###a href="https://www.theguardian.com/business/2015/aug/14/greece-edges-third-bailout-positive-signals-germany" data-link-name="in body link" class="u-underline">€86bn bailout.
Tsipras says that Greece has overachieved on the budget targets set by Europe and that the money will be going to those hardest hit by austerity. Greece has seen its economy shrink by 30% since its financial crisis began in 2009.
Kathrin Muehlbronner, a senior vice-president at Moody’s, said: “The suspension points to renewed tensions between Greece and its European creditors and will likely delay completion of the second review of Greece’s current economic adjustment programme and the disbursement of around €6.1bn in ESM funding, a credit negative.
“Such a delay increases the risks that repayments to bondholders due in July 2017 may be missed.”
There had been hopes that talks between Greece and its creditors would be concluded with time to spare before the country is due to make debt repayments next summer.
Muehlbronner said she still expected the review to be completed – but added that it would be hard for Tsipras to force through painful reforms given his wafer-thin parliamentary majority and the opposition to fresh austerity measures.
“Freezing the ESM’s debt-relief measures indicates renewed hardening in creditors’ positions toward Greece, which we expect will prolong negotiations over the second review of the programme. Political dynamics in Europe and the electoral calendar of key European creditors including France and Germany are likely to complicate the negotiations and prevent a rapid resolution.
“For Greece, lingering obstacles to the implementation of the politically challenging reforms in the second review of the programme revolve around labour and product market reform and additional steps toward privatisation. These include Greece’s governing coalition’s slim three-seat majority in parliament, weak institutions and elevated social discontent,” said Muehlbronner.
Greece’s bond yields have risen sharply since the ESM suspended its planned debt relief, with interest rates on 10-year bonds standing at just over 7%. Tsipras has been under pressure from Greece’s central bank to back down rather than risk an escalation of the tension.
Muehlbronner said Greece’s track record of reform implementation, Europe’s desire to keep the country in the eurozone, and the risks of any renewed flare-up of its sovereign debt crisis, suggested the eventual completion of the second review.
“However, a material delay in the negotiations would raise the credit risk to bondholders. Greece has large upcoming maturities in July 2017, with €2.3bn owed to private-sector bondholders and €3.9bn to the European Central Bank. Greece will be highly challenged to meet these redemptions without completion of the programme’s second review and without the disbursement of €6.1bn of ESM funding by the summer.”