Greece gets warnings from creditors: Accord is the beginning [Update]

One phrase echoed from Brussels to Frankfurt and Washington as Greece’s creditors examined and then waved through the country’s new economic policies: “starting point.”

While the month-old government in Athens was praised for coming up with a workable package of measures including maintaining state-asset sales and collecting more tax, the European Commission, European Central Bank and International Monetary Fund all warned that action speaks louder than words.

“The conditional agreement to extend the current program is just the first hurdle in a long race,” Maria Paola Toschi, global market strategist at JPMorgan Asset Management, wrote in a note to clients on Tuesday. “We expect the negotiation process to continue to blow hot and cold.”

The measures were a condition for extending the availability of bailout funds for another four months based on an initial agreement on Feb. 20. While their approval on Tuesday marked another compromise in Greece’s five-year financial crisis for the euro region, the country finds itself in all too familiar territory: act or face insolvency.

April deadline

The list is “not very specific” and doesn’t convey “clear assurances” that reforms will happen, IMF Managing Director Christine Lagarde wrote in a letter to the head of the euro region’s group of finance ministers. Commission officials and ECB President Mario Draghi also said the key to Greece winning more funding were “commitments” on legislation.

The current program, which has been keeping Europe’s most indebted state afloat since 2010, was scheduled to expire at the end of this month. After almost four weeks of negotiations, all parties stepped back from the brink, with Prime Minister Alexis Tsipras, 40, declaring an end to austerity while creditors said previous agreements were upheld.

Now Tsipras’s government doesn’t just need to offer more details on its plan, it has to follow through — and fast. Its cash-flow problem still needs to be resolved, a Greek Finance Ministry official said Tuesday.

Greece has until April to refine the details and show the finance ministers how it will do it. Greece can’t access more bailout funds, including the next tranche of about 7 billion euros ($7.9 billion), unless it passes the review. The government and its creditors can now also begin talks on how to overcome the cash squeeze next month, with issuance of more Treasury bills one option to consider, the official said.

Irish example

Irish Finance Minister Michael Noonan said on Wednesday Greece should emulate his country and seek to reduce interest rates while pushing for later repayment dates.

“There’s a middle road and it’s along the lines of what we did in Ireland,” Noonan said in an interview with Bloomberg Television in London. “You negotiate to make your debt more sustainable, even without getting debt write-offs.”

The agreement as it stands marks a turning point for Greece and Europe, the government said in an e-mail to reporters on Tuesday. Greece managed to escape from the “death trap” that extreme austerity had created, it said.

“They realized if we want to get Greece out of this crisis they need a strong reform program,” Dora Bakoyannis, 60, a former foreign minister and mayor of Athens from the New Democracy party that lost to SYRIZA in the election, told Bloomberg Television. “We lost four months and we can’t afford to lose time anymore.”

Accident avoided

Euro-region finances ministers approved the Greek reforms, which also include changes to the labor market and a clampdown on illegal trade and corruption, on a conference call Tuesday following the recommendation from the creditor institutions.

As Tsipras and his finance minister, Yanis Varoufakis, locked horns with the euro region, there was a show of support with thousands of people rallying in Athens. Tuesday, it was stock and bond markets that reacted more positively, while Greeks appeared more subdued about the outcome.

The ASE stock index rose almost 10 percent before declining 1.1 percent as of 2:07 p.m. in Athens on Wednesday. Yields on three-year bonds extended declines, falling 19 basis points to 12.24 percent. They dropped 268 basis points on Tuesday, the lowest since the day after the Jan. 25 election.

“I am satisfied with how negotiations turned out in the sense that an accident, such as an exit from the euro, has been avoided,” said Yiannis Pelekanakis, 38, who is in the process of setting up an ice-cream business in Athens. “However, this is merely the beginning. A series of deep, necessary reforms must occur in Greece so it is not more of the same yet again.”

Internal strife

The package needs to be put to national parliaments for formal consent. Lawmakers and officials in Germany, Finland and the Netherlands signaled they won’t stand in the way once their governments grant approval for the aid extension.

Keeping the Greek Parliament onside is what will concern Tsipras, whose SYRIZA party was hoisted to power on a platform of ending austerity, a partial debt writedown and no more audits by the European Commission, the ECB and the IMF.

The government must now win over skeptical lawmakers that its compromises were worthwhile. The agreement has been criticized by figures in the party, including Manolis Glezos, a 92-year-old SYRIZA European Parliament lawmaker and World War II resistance veteran.

The finance ministry official, who was speaking on condition of anonymity, said already cracks are appearing in the party over the new measures.

“SYRIZA may not be able to pass these internally,” said Pelekanakis. “Unfortunately, uncertainty remains.” [Bloomberg]