On 11 August, the expert representatives of both Greece and its eurozone creditors reached an agreement on the basic parameters of the third Greek bailout program. When last details were settled, the Greek parliament voted on the deal, as well as on a set of first preconditions for its launch, on Friday 14 August in the morning. Then, in the evening, the eurozone finance ministers gave their political blessing.

The new 3-year ESM-funded program is worth €86 bn. Greece will have to go through tough reforms in areas such as VAT, pensions, regulated professions, civil justice or education. Also, state assets will be privatized. Greek banks, currently on the brink of collapse, are also mentioned in the new Memorandum of Understanding – the formal name of the deal and the term most commonly used in Athens for the bailout. Bank resolution rules will be adjusted to match eurozone standards and banks will be recapitalized – either from the new ESM-provided loans, or from privatization. However, the new agreement excludes bail-in of individual depositors´ money – the citizens´ bank accounts will thus remained untouched. Privatization will be realized through an independent fund, co-administered with the European institutions, to which the Greek state will transfer its assets, including recapitalized banks, to reach a cumulative value of €50 bn. Profits from the privatization will be used for further bank recapitalizations, for debt servicing and for investments in the economy. Greece will be able to run a primary fiscal deficit this year of 0.25% of GDP, but starting next year its budget will get on a path to reach a 3.5% of GDP primary surplus in 2018.

As with the previous programs, there will be regular reviews assessing Greek reform effort. First €26 bn will, however, be disbursed immediately after the final approval of the bailout by the ESM board of directors – expected on Wednesday 19 August. Some €13 bn will be immediately sent to Greece, in order for the Greeks to be able to honor their commitments to the ECB due on 20 August. Next €10 bn will be put aside to a separate account within the ESM for quick bank recapitalizations. The final €3 bn of the first tranche will be disbursed by the end of August.

Following both technical and political agreements last week, several eurozone parliaments will now vote on the program. The attention is mostly focused on the German Bundestag. The vote is expected on Wednesday 19 August and heated debate is likely to take place. The same day, subject to approval of the aforementioned parliaments, the ESM Board of Directors will take a final vote.

There is still one critical question which rests unresolved – possible IMF involvement. Mainly Germany would like to have the IMF on board – chiefly for its expertise and credibility on fiscal adjustment programs. However, the IMF worries that the Greek debt has become unsustainable and therefore sees any bailout unaccompanied by debt relief as prone to fail. And it does not intend to risk its reputation on a failing program. IMF director Christine Lagarde promised the Eurogroup on Friday to recommend the IMF Board to re-assess the possible program participation in October – at that time it will likely be visible if the reform effort is sufficient in Greece and thus if the program has a chance to succeed. As for Greek debt relief, Germany and Slovakia ruled out any nominal debt cuts (preferred by the IMF). However, EU sources indicate talks are ongoing on other adjustments, such as longer grace or repayment periods.

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