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ESM opens way for discussion to reduce primary surplus in 2020

Head of the European Stability Mechanism (ESM), Claus Regling, has paved the way for reduction of the primary surplus and welcomed Greece’s intention to repay the IMF loan earlier than planned.

Following the Eurogroup meeting on Friday, Regling said that if the growth rates of the Greek economy were higher than expected and the borrowing cost lower, the discussion about reduction of the primary surplus could begin in 2020.

Regarding the early repayment to the IMF, Regling said that this procedure would last about two months.

Excerpt of Regling’s speech:

“In Greece, the new finance minister talked about policy priorities of the new government. I welcome the growth-friendly reforms that are very much at the top of the agenda of the new government, fostering strong sustainable growth.

It’s important for Greece and it’s also our top priority, looking from the ESM because we are by far the largest creditor of Greece and therefore everything that helps growth will also help the repayment capacity over the long run. You know our loans are running for four decades, but still it’s important to get on a good growth trajectory. And this is important because growth at the moment or the first half of this year, was less than what we had assumed when Greece left the programme. So it’s important to get back to the anticipated level.

I also welcome the good collaboration with the new government, the new finance minister and the prime minister. I also welcome the intention to proceed with an early repayment of the expensive part of the IMF loan. We will do the necessary preparation because this requires waivers from our boards (EFSF and ESM). So we will start the process and work on that and all that can happen together with the assessment of the 2019 and 2020 budget when the mission starts next week.”

Question on the early repayment of IMF loans by Greece and whether a new discussion is possible on the level of Greece’s primary surplus.

On the IMF early repayment, we had no discussion today. The Greek finance minister talked about the priorities and this is one of them. But there was no debate after that. But my feeling is that there is a lot of sympathy for that – certainly from my side. As I said earlier, I welcome such an early prepayment for a very simple reason. It improves debt sustainability of Greece because the expensive part will be prepaid. So Greece would save interest payments and the IMF has no problem with that – for the IMF, this is a normal procedure. So we have to go through our internal process to provide the waiver. That may take two months or so, but my expectation would be that this works.

I know the IMF has repeated its known view that they believe the primary surplus is too high. This is not new for us, it was discussed many times in the past years. The new government has confirmed that for 2019 and also when they put together a budget for 2020, the primary surplus target of 3.5% will be observed. And then the Greek government wants to have a discussion; we will see. The only way I can see how one could really have a substantive discussion is if growth were to be higher than we assumed in our last debt sustainability analysis and interest rates are in the long run lower. But this is a debate that will only come later next year when we are well into the 2020 budget and there we have a clear understanding of what will happen.

What is interesting is that despite media reports in the previous days, Greek Finance Minister Christos Staikouras neither submitted an official request for the IMF repayment nor did he file for primary surplus reduction.

He has time anyway, as he has to include the 3.5% surplus in the budget of 2020…

PS Very “generous” those lenders. They will squeeze the last half cent out of us.

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