No backtracking on reforms, Dombrovskis warns Greece

The European Commission’s vice president, Valdis Dombrovskis, warned Greece in an interview with Kathimerini on Sunday of the importance of “continuous adherence to reforms and post-program fiscal targets.”

Speaking on the sidelines of the International Monetary Fund’s spring meeting in Washington, the European official, who is also responsible for the euro, stressed that commitment to reforms is what markets will be looking for when Greece exits its bailout program in August.

“Now that the Greek program is drawing to a close and will finalize in August, we are preparing the final review of the program and preparing basically for Greece to re-enter financial markets,” Dombrovskis said. “For this, of course, it is important that there is confidence from the financial markets in the Greek economy and in the sustainability of Greek debt.”

He said that for this to happen, the Greek government needs stay on track with the implementation of reforms and its “post-program fiscal trajectory, but also includes program partners, including the IMF, signaling to the markets.”

The IMF’s position is important, Dombrovskis said, because even though it may not have participated in Greece’s third program financially, “it still participated as a partner in discussions on conditionalities and macroeconomic outlook on debt sustainability.”

Responding in regards to demands from countries like Germany that Greece remain under strict post-program surveillance that will also be linked to debt relief, Dombrovskis said that “like all program countries, Greece will enter post-program surveillance, but that is a less intrusive framework than a program.”

“It’s clear that the application of debt measures will also continue for many years after the program, the growth adjustment mechanism, adjusting the debt servicing cost to the performance of the economy,” he said. “One of the elements that will be important to keep the growth adjustment mechanism on track is for Greece to stay on track in regards to its post-program fiscal trajectory, maintaining high levels of primary surplus for a prolonged period of time.”

Beyond EU surveillance, however, market confidence will be key to the Greek economy’s recovery, Dombrovskis stressed.

“If there is any talk of backtracking on structural reforms or fiscal discipline, this will erode market confidence, will make the financing of Greek debt more difficult and more costly,” he said. “It’s important that Greece signals to the markets its continuous adherence to reforms and post-program fiscal targets to ensure market confidence and to ensure the possibility of refinancing its debt gradually with favorable conditions.”

Regarding concerns of delays in wrapping up the fourth and final program review by June 21, the officials said the scope for delays in this case is much more limited as the program expires in August. “Currently work is on track in regards to prior actions, and there is clear commitment to complete the review and the program.”

Dombrovskis said that since the Greek government has already signaled it does not intend to apply for a precautionary credit line, talks on post-program surveillance are not considering this eventuality. “This makes it more important that there is a clear commitment from the Greek side on continuous adherence to structural reforms,” he said.

Asked what markets will be looking for once Greece completes the economic adjustment program, Dombrovskis said the focus will be on developments on public debt and debt measures. “Greece has the highest debt level in the EU at around 180 percent of GDP but pays debt servicing costs lower than Italy and Portugal, which have a debt-to-GDP ratio of around 130 percent,” he said. “This shows that conditions for Greek debt are already favorable.”
The markets, he added, are also going to monitor whether there is a “sustained substantial primary surpluses for an extended period of time.”

“There is an agreement on a primary surplus of 3.5 percent to be sustained for some period and then it will gradually go down,” Dombrovskis said. “It’s one of the elements where we need to have the right balance. On one hand Greece needs to sustain a high primary surplus but also have some room to maneuver for continued economic growth. With the current tentative fiscal trajectory, this balance is broadly ensured.”

Dombrovskis also stressed the need for Greece to attract foreign investment by improving the business environment, saying that “you cannot expect to stimulate the public economy via the public sector.”