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The resumption of bailout payments and a modest improvement in the economy have put the risk of a Greek default on the back burner again, but major debt relief will ultimately be needed to keep the country in the euro-zone, says Capital Economics in it European Economic Outlook.Greece finally passed its second bailout review and received a €7.7bn loan tranche from the ESM early in July, allowing it to meet its debt redemptions. A further €800m will be provided in September assuming that some state arrears are cleared by then. No major debt repayments are due for another year.
The economic research company adds that at least partly due to all this, the economy of Greece is again showing tentative signs of recovery. Arise in the manufacturing PMI to above the “no change” level of 50 suggests that GDP probably just about expanded again in Q2, after a 0.4% y/y rise in Q1. What’s more, some success in fiscal consolidation has caused the EC to recommend the termination of Greece’s Excessive Deficit Procedure.
This has all resulted in an encouraging drop in government borrowing costs, with the ten-year yield now at 5.3%. Accordingly, there is speculation that the Government will soon try returning to financial markets, starting with a five-year debt issue.
But euro-zone creditors will still need to agree to major debt relief before the IMF will fully support the bailout, the ECB will agree to include Greece in its QE programme and deposits will return to the banks, underlines says Capital Economics and concludes: We suspect that only this would see borrowing costs fall to levels at which Greece could finance itself fully. Since debt relief is a distant prospect at best, a fourth bailout may yet be needed when the current one expires next August.