As Greek Prime Minister Antonis Samaras tries to follow Ireland and Portugal out the bailout exit door, he faces a month of bargaining.
For a nation that’s already gone through the biggest debt restructuring in history, the key may lie in more relief. Talks that could ultimately set the stage for that begin in Paris next week when government and officials from the European Union, European Central Bank and International Monetary Fund meet to discuss September's review of the country's rescue program.
“The Paris talks are critical,” Michael Michaelides, a rates strategist at Royal Bank of Scotland Group Plc in London, said on Thursday by e-mail. “They will lay the framework for discussions that will include a debt deal as well as the 2015 budget and the latest key reforms.”
Two years ago, with Greece’s euro membership in jeopardy and the currency region close to splintering, the government persuaded private bondholders to write down about 100 billion euros ($132 billion). Greece must pass next month’s bailout review before European partners will consider writing off more borrowing. At about 175 percent of gross domestic product, Greece’s debt burden remains the biggest of any euro member.
In Ireland, which exited its 67.5 billion-euro bailout in December, the debt ratio is forecast to be 121 percent this year, the European Commission said in May. In Portugal, the ratio will be 127 percent, it said.
The yield on Ireland’s benchmark 10-year bonds dropped to about 1.76 percent yesterday compared with a peak of 14.2 percent in July 2011, while the yield on the comparable Portuguese security was 3.1 percent. Portugal’s 78 billion-euro international bailout program ended in May.
Greek 10-year yields have fallen to 5.76 percent, close to June’s record low, compared with a high of 44.21 percent in March 2012 on the eve of the debt restructuring.
While Samaras hasn't laid out a detailed timetable to exit the bailout, the prime minister has repeatedly promised that Greece won’t need another rescue.
The bond rally allowed the government to tap international markets twice this year, raising 4.5 billion euros in three- and five-year securities. Still, last month’s 1.5 billion-euro sale of three-year notes fell short of the government’s target of as much as 3 billion euros.
Samaras' euro partners stalled on granting more relief by, for example, extending the terms of loans or cutting interest rates on the nation’s 240 billion euro bailout.
The country's primary budget surplus of 0.8 percent of GDP last year commits its euro-area partners to additional debt relief, provided it can convince them that it’s also abiding by the economic reforms agreed to in the bailout. A primary surplus excludes payments to service debt.
"Greece is trading off other assets awaiting the talks in Paris next week followed by the troika review and developments on that front," said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. "Greek bonds have become market followers for the time being, but at least the yields are performing in line with markets."
Winning debt relief isn’t the only problem facing Samaras.
In September, he will try to pass laws to deal with 77 billion euros of non-performing loans at the country’s banks. Samaras’s New Democracy and coalition partner Pasok together have 154 seats in the 300-member Greek Parliament, and the government's stability was tested by EU elections in May won by the anti-bailout Syriza party.
Syriza has said it will block whatever candidate Samaras’s coalition government puts forward to replace President Karolos Papoulias, whose term ends in March.
Samaras may have to find support among minor parties and independent lawmakers to secure the two-thirds parliamentary majority required for a president to fill the post.
"Successfully electing a new president is neither trivial nor impossible,» Nomura International Plc said in an August 26 note to clients. "It seems that some additional factor will be needed to tilt the balance toward success or failure in the task. This factor will likely be progress in official debt relief and the extent to which Greece manages to enter a visible path toward exiting troika supervision."