Economy

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Poverty data from the Hellenic Statistical Authority (ELSTAT) illustrate the timeless significance of pensions when it comes to containing poverty risk in Greece, and the protection of sorts they provide for pensioners when compared with other social groups such as the unemployed or women.

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At an internal meeting in April, the new head of China’s banking regulator said he would resign “if the banking industry becomes a complete mess”. On Friday Guo Shuqing and colleagues at the China Banking Regulatory Commission were working to ensure that they had not just created exactly that.

News that the CBRC was assessing banks’ exposure to five companies, including four of the country’s most aggressive overseas investors, triggered a sell-off in their stocks and bonds on Thursday.

The situation appeared to have stabilised on Friday. Shares in one of the affected companies, Wanda Group’s Shenzhen-listed film studio unit, rose 3.6 per cent after three large shareholders said they would boost their holdings.

China’s central bank has been trying this year to discourage risky borrowing by tightening conditions in short-term money markets while leaving benchmark interest rates untouched. The result has been a rare “inversion” in Chinese sovereign bond yields, with one-year and five-year bond yields now higher than those for 10-year debt.

“The CBRC action will cause turmoil in an already difficult market environment,” said Thilo Hanemann at the Rhodium Group, which has closely tracked the surge in outbound Chinese M&A activity over the past two years.

“The regulators have been moving very fast to identify risks,” said a person close to Chinese policymakers. “But they sometimes move without being fully aware of the consequences of their action.”

The CBRC’s move is the latest gust in what domestic media have labelled a “regulatory windstorm” in which eight policy documents have been issued since February, aimed primarily at discouraging leveraged investment in the bond market.

The People’s Bank of China kicked off a clampdown on outbound investment in February by tightening approvals of overseas acquisitions and other capital outflows. The securities regulator then promised to crack down on “barbarians” who were borrowing heavily to amass stakes in listed companies. The insurance regulator banned a prominent executive from the industry after his business allegedly provided false data and misused funds.

Mr Guo, 61, is a highly regarded technocrat who has spent his career alternating between senior financial and regional positions, the most recent of which was governor of Shandong, one of China’s largest industrial provinces. He is also regarded as a possible successor to Zhou Xiaochuan, the long-serving head of China’s central bank.

Bankers believe he is keen to make his mark and has a powerful bureaucracy at his disposal. “CBRC officials can be extremely hands-on,” said a former executive at a mid-sized Chinese lender. “They attended all of our quarterly meetings. They didn’t have a vote, but they were there and from time to time they were talking.”

One Chinese official who works on financial policy issues said the CBRC directive to the banks financing Anbang, Fosun, HNA Group and Wanda — which together accounted for more than $55bn of China’s outbound acquisitions over recent years — “came directly from the top”.

The official added that “it’s connected to all the other crackdowns we have seen recently, like the ones at the insurance regulator and in the securities sector”. The CBRC is also asking banks about their dealings with an investment vehicle used to purchase AC Milan, the Italian football club.

Xiang Junbo, former head of the China Insurance Regulatory Commission, was detained in April for alleged corruption. Mr Xiang has been temporarily replaced by the head of the regulator’s internal “discipline inspection” commission, which reports to the ruling Communist party’s corruption watchdog.

Yang Guoying, a researcher at the China Finance Think Tank, argues that the CBRC’s review of heavily leveraged companies’ overseas acquisitions is “a very normal risk control measure”.

“If the sources of their funds are domestic but the assets are overseas, this creates risk that can’t be totally controlled,” Mr Yang said.

Richard Xu, equity analyst at Morgan Stanley, said the longer-term impact of what is essentially a fact-finding mission will depend on what action it takes, if any, after its review of the banks’ dealings with Anbang, Fosun, HNA Group and Wanda.

“Following the rapid growth of overseas M&A by Chinese firms, policymakers are trying to conduct risk assessment of the credit that supported such M&A,” Mr Xu said. “Different banks report such credit under different categories, so it is hard to get a full picture based on existing data.”

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Bankers said on Friday that they shared the CBRC’s concerns about Anbang, whose chairman was detained by corruption investigators last week. Anbang has raised hundreds of billions of renminbi over recent years, mainly from sales of short-term investment products offering retail customers guaranteed high returns.

While many are also wary about highly geared HNA, like Fosun and Wanda it has operations — including China’s fourth-largest airline — with which they feel more comfortable doing business.

“For us there is a huge difference between Anbang and the others,” one banker said. “They shouldn’t be put in the same box.”

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The 622 million euros that Public Power Corporation (PPC) has collected from the sale of the Independent Power Transmission Operator (ADMIE) will not remain in its coffers for long, since its total obligations to suppliers, contractors, market entities and others exceed 1.8 billion euros.

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0 11

The government is considering the introduction of a monthly limit – instead of the existing biweekly one – for cash withdrawals at 1,800 euros in the context of a partial relaxation of capital controls, spokesman Dimitris Tzanakopoulos said on Thursday.

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The next significant step is Greece’s preparation to enter the markets”, Klaus P. Regling, the Managing Director of the European Stability Mechanism (ESM) said. In a briefing note to the members of the ESM Mr. Regling made it clear that the second sub-tranche of the 8.5 billion euro package would be released after summer and under the condition that Greece had contributed its share to pay off its overdue debts. The paper to the ESM members clarified that the first 7.7 billion-euro tranche would be disbursed at the start of July after the conclusion of talks in EU national parliaments.

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Cleaning workers protesting against their employment status dumped rubbish in front of the main entrance of the Interior Ministry in Athens earlier on Thursday. The cleaning workers, who have been on strike for the past days resulting in heaps of rubbish piling up in and around Athens at large, dumped rubbish in the main entrance of the Ministry during their march while knocking down the large gate. The workers are demanding they be hired on a permanent basis and are threatening to continue their strike for a 4th day. Recently the Court of Auditors ruled against the extension of their contacts as workers, prompting them to start a series of industrial actions. The situation in Athens has deteriorated with large piles of rubbish and the rising temperatures leading to an unbearable stench across the country’s capital.

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Greece’s latest deal with the Eurogroup—the group of eurozone finance ministers—is bigger news than you might think from the press reactions so far. As expected, Greece got its next disbursement of funds to avoid default, the International Monetary Fund (IMF) gave a symbolic stamp of approval, no actual debt relief will transpire until the end of Greece’s EU-supported reform program, and the IMF will not be prepared to disburse until that happens (if at all). This feels like business as usual. But there is more to the story.

The June 15 statement(link is external) of the Eurogroup contains at least three new and significant points. For the first time, it delivers an unequivocal commitment to debt relief. Second, it confirms that the Eurogroup (read: Germany) will accept interest deferrals as part of the package, a point that had recently been in doubt. Third, it lays out specific fiscal assumptions—not just for the next 2 or 5 years, but all the way to 2060. The first two are good news. On the third, the news is not so good, for reasons explained below. As a result, there is a high risk that the debt relief package that we will see next year—probably without endorsement by the IMF—will yet again kick the can down the road.

Commitment to debt relief

In its statement on May 25 last year(link is external), the Eurogroup “expected” to implement a set of debt relief measures including maturity extensions and interest deferrals “if an updated debt sustainability analysis (DSA) by the institutions at the end of the programme shows they are needed.” Last Thursday’s Eurogroup statement contains a similar sentence: “At the end of the programme, conditional upon its successful implementation and to the extent necessary, this second set of measures will be implemented.” But the context is entirely different. Last year, there was wild disagreement between the key parties—Germany, the European Commission, the IMF, and Greece—on what future fiscal primary surpluses Greece could reasonably be asked to produce. As Eike Kreplin, Ugo Panizza, and I showed in a recent PIIE Working Paper, the preferred assumptions of the German side at the time—and perhaps even those of the European Commission—implied no need for debt relief. So, the caveat “if an updated debt sustainability analysis…shows they are needed” was basically a loophole that would have allowed the Eurogroup to renege on meaningful debt relief measures.

This time, the Eurogroup statement lays out a full fiscal path until 2060. And as anyone can check using the DSA apparatus that we published along with our paper (an updated version is posted here), conditioning on that fiscal path, Greece’s future gross financing needs would blow up without debt relief—way beyond the upper limit of 20 percent of GDP that the Eurogroup has just reaffirmed. This proposition is true even based on the relatively optimistic growth assumptions of the European Commission—if the IMF’s assumptions were used, it would hold with even greater force. Here is the picture:

Figure 1 Evolution of Greece’s gross financing needs in the absence of debt relief (Click to enlarge)

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(Note: The figure shows the evolution of Greece’s gross financing needs (GFN) based on its current debt service obligations, assuming the fiscal path agreed at the Eurogroup meeting on June 15, 2017 and European Commission projections envisaging real growth rising to about 3 percent in the short and medium term and subsequently declining to long-run rate of 1.25 percent by 2030. The black dotted line describes the evolution of GFN if uncertainty is ignored. The blue line is the median of the distribution of GFN using a methodology that incorporates uncertainty. The boundaries between the shaded areas describe GFN at the 10th, 20th, 30th, 40th, 60th 70th, 80th, and 90th percentile levels of that distribution. The two red lines show the maximum range that GFN must exceed, according to the Eurogroup statement. For details on methodology and ancillary assumptions, see Zettelmeyer, Kreplin, and Panizza, “Does Greece Need More Official Debt Relief? If So, How Much?” PIIE Working Paper 17-6.)

There is still disagreement (as well as genuine uncertainty) on how much debt relief Greece will need—hinging mostly on growth assumptions and on the private borrowing rate that Greece can expect after it reaccesses capital markets. But the fact that there will be significant debt relief is no longer in doubt. This is also clear from the comparatively direct, uncaveated language used elsewhere in the statement. For example, “The exact calibration of these measures will be confirmed at the end of the programme by the Eurogroup on the basis of an updated DSA.” The open questions refer to “exact calibration,” not debt relief per se.

Acceptance of EFSF interest deferral up to 2037 (and possibly beyond)

Our analysis of the Greek debt problem pointed out that the approach sketched by the Eurogroup in May last year would make the Greek debt sustainable only if it included extensive deferrals of interest payments to the European Financial Stability Facility (EFSF), Greece’s original crisis lender. However, these deferrals have an unpleasant implication: Since they are capitalized (rolled into principal), they imply a rising exposure of the EFSF to Greece. In effect, the EFSF would lend additional funds to Greece to allow it to pay its interest bill. We showed that, under plausible assumptions, EFSF claims on Greece might rise by almost €150 billion, more than the currently owed amount, before they slowly start declining. Even in 2080, Greece’s outstanding debts to the EFSF might still be higher than they are today. We speculated that this would not be acceptable to the conservative bench in the Eurogroup. And indeed, a few weeks after we circulated our paper, the Handelsblatt reported(link is external) that the German Finance Ministry was taking a “Hard Line on Greek Interest Deferrals,” apparently based on calculations very similar to ours.

If this hard line had prevailed at the Eurogroup, it would have made debt relief of the kind demanded by the IMF difficult if not impossible. But it did not prevail. Instead, the Eurogroup opted for a compromise, allowing interest deferrals for an additional 15 years—that is, until 2037—“so long as the total established by the EFSF Programme Authorised Amount is respected.” That ceiling, €241 billion, is very unlikely to be binding over this period. On top of this, the Eurogroup statement envisages a “contingency mechanism on debt” that would allow “further EFSF re-profiling and capping and deferral of interest payments” in case of an unexpectedly adverse scenario.

A preliminary number-crunch shows that, conditional on the fiscal path agreed on Thursday and European Commission growth projections, interest deferrals and maturity extensions within the time frame envisaged by the Eurogroup statement would indeed be enough to make the Greek debt sustainable. Problem solved? Not necessarily. That depends on the realism of the underlying assumptions. And here, the news is not so good.

Fiscal assumptions up to 2060

While the Eurogroup did not commit to a specific debt relief package, it was very specific in describing the fiscal assumptions of such a package—all the way to 2060. The fact that it did is good news. The content of what it described, however, is worrisome.

First the mostly positive side. The Eurogroup is now requiring Greece to maintain a 3.5 percent primary surplus for four years after this is attained in 2019, based on program assumptions. This is much shorter than what the European Commission had assumed before and—as we showed in our working paper—roughly in line with historical precedent. Although it is far from ideal—a country in which investment has collapsed and unemployment remains at 23 percent ought to be given more fiscal slack—it is achievable.

Now the bad news. For the period after 2022, the Eurogroup assumes “a fiscal trajectory that is consistent with its commitments under the European fiscal framework, which would be achieved according to the analysis of the European Commission with a primary surplus of equal to or above but close to 2 percent of GDP in the period from 2023 to 2060.”

Wow. A primary surplus of more than 2 percent, year after year, for a 40-year period? To our knowledge, this has never happened, in any country, since World War II. Forty-year spells with average primary surpluses of 2 percent have occurred, mostly in emerging-market countries. But even they are very rare. More generally, it is not clear that 40-year fiscal commitments have much meaning. The argument seems to be that it is not a new commitment but rather an implication of EU fiscal rules. But this raises the question why all European Commission scenarios so far envisaged a primary surplus of 1.5 rather than at least 2 percent of GDP over the same time horizon. Furthermore, the implementation record of EU fiscal rules historically has been poor—not just in Greece, but in many other EU countries.

In sum, the June 15 Eurogroup statement is the first to suggest a euro area consensus that significant debt relief will in fact happen if the current program is successfully completed––as now seems likely. To cite both Eurogroup president Jeroen Dijsselbloem and Greek finance minister Euclid Tsakalotos, this is a big step forward(link is external). Another important step is the confirmation that interest deferrals are fair game, within certain limits, in the context of any future debt deal.

Less reassuring, however, are the fiscal assumptions that the parties now appear to have agreed on. While a 3.5 percent primary surplus until 2022 can be justified using historical precedent, it will make it tough to revive public investment. And maintaining the surplus above 2 percent for an extra 37 years, as is now being assumed, would require unprecedented stamina.

To be clear, the point of a debt relief package is not to maximize the welfare of the debtor. It is to find a good balance between debtor interests, creditor interests, and maintaining good incentives for Greece and for the euro area more broadly. But this requires a realistic vision of what a country can deliver. The fiscal path assumed by the Eurogroup does not meet that standard. If a future debt relief package is built on that assumption, it will likely fall short.

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0 11
Isometric greece crisis

The deal struck last week between Greece and its euro-zone creditors is business as usual — and that’s not a good thing. This protracted game of “extend and pretend” serves nobody’s long-term interests: not those of the Greek government, the International Monetary Fund or, most of all, the people of Greece.

Euro-zone finance ministers have unlocked a payment of 8.5 billion euros ($9.5 billion), the newest installment of a rescue plan worth 86 billion euros. This will let Athens make debt repayments of 7 billion euros that fall due next month. But there’s still no agreement on how to get Greece’s debt burden under control. The IMF had previously insisted that this question should be settled now.

It was right, and it should have stuck to that position. The new agreement fails to recognize what everybody knows: that Greece’s debt is unsustainable on the current terms.

In an effort to pretend otherwise, Athens has promised primary budget surpluses (meaning net of interest payments) of 3.5 percent of gross domestic product until 2022, and then of “above but close to 2 percent” until 2060. True, the Greek economy achieved a better-than-expected primary surplus last year. As the European recovery gathers pace, there could be more good fiscal news. But the idea that Greece can maintain this degree of fiscal control for the next 40 years is ridiculous.

For instance, at some point during the next four decades, there might be another recession. Stranger things have happened.

The blow to the credibility of the IMF could prove to be lasting damage. The fund points to its refusal to disburse money at this point as proof it’s serious about debt relief. Yet it remains a partner in a project that, by its own analysis, is bound to fail. It should have said, enough. Europe doesn’t need the fund’s money or expertise. Governments only sought the fund’s seal of approval — and should have been denied it.

Granted, the euro zone has done a lot to support Greece since its fiscal crisis began. Athens has been granted no fewer three rescue packages, worth 326 billion euros in total. The euro zone has allowed generous grace periods for official loans, extended their maturities and lowered the interest rate. As a result, Greece’s debt repayments are actually quite manageable for now.

But this won’t last. Grace periods come to an end. As interest rates creep up, Greece’s debt repayments will rise too. The perpetual primary surpluses creditors are demanding will squeeze the economy so hard that they’ll be self-defeating even in narrow fiscal terms.

All of this is well understood. Greece needs a new deal, offering debt relief in exchange for progress on reform. Maybe the EU will be willing to agree to this next year, when the existing program expires. But there was no good reason for failing to propose it now.

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0 9
Isometric greece crisis

The deal struck last week between Greece and its euro-zone creditors is business as usual — and that’s not a good thing. This protracted game of “extend and pretend” serves nobody’s long-term interests: not those of the Greek government, the International Monetary Fund or, most of all, the people of Greece.

Euro-zone finance ministers have unlocked a payment of 8.5 billion euros ($9.5 billion), the newest installment of a rescue plan worth 86 billion euros. This will let Athens make debt repayments of 7 billion euros that fall due next month. But there’s still no agreement on how to get Greece’s debt burden under control. The IMF had previously insisted that this question should be settled now.

It was right, and it should have stuck to that position. The new agreement fails to recognize what everybody knows: that Greece’s debt is unsustainable on the current terms.

In an effort to pretend otherwise, Athens has promised primary budget surpluses (meaning net of interest payments) of 3.5 percent of gross domestic product until 2022, and then of “above but close to 2 percent” until 2060. True, the Greek economy achieved a better-than-expected primary surplus last year. As the European recovery gathers pace, there could be more good fiscal news. But the idea that Greece can maintain this degree of fiscal control for the next 40 years is ridiculous.

For instance, at some point during the next four decades, there might be another recession. Stranger things have happened.

The blow to the credibility of the IMF could prove to be lasting damage. The fund points to its refusal to disburse money at this point as proof it’s serious about debt relief. Yet it remains a partner in a project that, by its own analysis, is bound to fail. It should have said, enough. Europe doesn’t need the fund’s money or expertise. Governments only sought the fund’s seal of approval — and should have been denied it.

Granted, the euro zone has done a lot to support Greece since its fiscal crisis began. Athens has been granted no fewer three rescue packages, worth 326 billion euros in total. The euro zone has allowed generous grace periods for official loans, extended their maturities and lowered the interest rate. As a result, Greece’s debt repayments are actually quite manageable for now.

But this won’t last. Grace periods come to an end. As interest rates creep up, Greece’s debt repayments will rise too. The perpetual primary surpluses creditors are demanding will squeeze the economy so hard that they’ll be self-defeating even in narrow fiscal terms.

All of this is well understood. Greece needs a new deal, offering debt relief in exchange for progress on reform. Maybe the EU will be willing to agree to this next year, when the existing program expires. But there was no good reason for failing to propose it now.

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0 12

The confusion seen on Tuesday over whether owners of uninsured vehicles should pay the 250-euro stamp duty or not came on top of the hundreds of thousands of erroneous notices sent last week to taxpayers asking them to pay for the insurance of their vehicles.

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0 15

The growth of the Greek bourse’s main index without the support of the bank sector is a trend that has emerged in in recent days and continued on Tuesday, with the banks index underperforming compared to the market benchmark, which keeps hitting new two-year highs every day.

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A report on the sustainability of Greek debt was filed by the Commission at the ECOFIM last week, part of which reveals Bloomberg and probably hides several unpleasant surprises for Greece.

According to the baseline scenario the Commission has examined, the country’s gross financing needs will drop to 9,3% in 2020 from 17,5% expected this year. However, they will gradually increase from 2020 onwards and will exceed 20% after 2045, reaching 20,8% by 2060. It should be reminded, according to the Eurogroup decision last week, that mixed financing needs should be Will fall to 15% of GDP for some time, and then they should not exceed 20% of GDP by at least 2060.

Also, according to the Commission’s baseline scenario, the Greek debt will reach 176% of GDP this year, will decline to 159,9% of GDP in 2020 and will continue to decline by reaching 123,1% of GDP in 2030 and 91,6% of GDP in 2060. It is worth noting that even in this case the Greek debt will remain, after 2060, sufficiently higher than the 60% of GDP set by the Stability and Growth Pact!

However, it is worth considering more closely the unfavorable scenario -which in no case can be ruled out- presented by the Commission to the EU finance ministers.

On this basis, as the Commission notes, the Greek debt will “explode” in the mid-2030s, reaching the disastrous 241% of GDP in 2060!

Also, according to the unfavorable scenario, the gross financing needs will reach 20% in 2033 and rise to 56% of GDP in 2060!

However, the Commission also reserved a relatively good news for Greece, considering that at the end of the program the country would not have used ESM loan capital of 27,4 billion euros.

At the same time, the report says there is “significant concern about the dynamics of Greek debt”, while the Commission asks the partners to take additional measures towards a debt relief, always on the basis of the agreements that took place in the Eurogroup in May 2016 as well as in June 2017.

“An appropriate mix of debt relief measures (including short-term measures), extending payback time and applying a grace period to paying interest, can lead the gross financial needs to sustainable levels,” the report from the Commission notes.

At the same time, the Commission -which until now was supporting the government- does not hesitate to report that “there is uncertainty about the ability of the Greek government to maintain high primary surpluses for the next 10 years. There are significant risks that can lead to a decline in growth”.

The Greek government is required to set up a reserve of nine billion euros in order to finance its needs for about 10 months after the end of the program. Greece will have to cover 18,9 billion Euros in interest payments until August 2018, while the state will have to repay 6,5 billion Euros in debts to the private sector.

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Following a significant delay, state sell-off fund TAIPED announced on Monday that the consortium of Deutsche Invest Equity Partners (DIEP) with the subsidiary of France’s CMA CGM, Terminal Link SAS, and Belterra Investments of Ivan Savvidis is the preferred bidder for a 67 percent stake in Thessaloniki Port Authority (OLTH).

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fitch

Fitch credit ratings agency has upgraded the Greek banks in light of the recent deal at the EuroGroup and the completion of the second review. Fitch has affirmed the Long-Term Issuer Default Ratings (IDRs) of National Bank of Greece S.A. (NBG), Alpha Bank AE (Alpha), Piraeus Bank S.A. (Piraeus) and Eurobank Ergasias S.A. (Eurobank) at ‘Restricted Default’ (RD). At the same time the agency has upgraded the four Greek banks’ Viability Ratings (VRs) to ‘ccc’ from ‘f’. The upgrade of the VRs reflects the banks’ improved liquidity and Fitch’s expectation that the completion of the second review of Greece’s third economic adjustment programme reduces political risks and will strengthen depositor and investor confidence in the Greek banking system. The banks’ IDRs of ‘RD’ reflect Fitch’s view that the Greek banks are defaulting on a material part of their senior obligations given that capital controls, through restrictions on deposit withdrawals, are still in place in Greece. Full lifting of capital controls is unlikely in the short term in Fitch’s view, but the agency expect gradual steps towards capital controls relaxation and in particular, gradual removal of restrictions on deposit withdrawals.

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fitch

Fitch credit ratings agency has upgraded the Greek banks in light of the recent deal at the EuroGroup and the completion of the second review. Fitch has affirmed the Long-Term Issuer Default Ratings (IDRs) of National Bank of Greece S.A. (NBG), Alpha Bank AE (Alpha), Piraeus Bank S.A. (Piraeus) and Eurobank Ergasias S.A. (Eurobank) at ‘Restricted Default’ (RD). At the same time the agency has upgraded the four Greek banks’ Viability Ratings (VRs) to ‘ccc’ from ‘f’. The upgrade of the VRs reflects the banks’ improved liquidity and Fitch’s expectation that the completion of the second review of Greece’s third economic adjustment programme reduces political risks and will strengthen depositor and investor confidence in the Greek banking system. The banks’ IDRs of ‘RD’ reflect Fitch’s view that the Greek banks are defaulting on a material part of their senior obligations given that capital controls, through restrictions on deposit withdrawals, are still in place in Greece. Full lifting of capital controls is unlikely in the short term in Fitch’s view, but the agency expect gradual steps towards capital controls relaxation and in particular, gradual removal of restrictions on deposit withdrawals.

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indirect taxes

Greece will have to raise indirect taxes to the tune of 3.5 billion euros annually from the current fiscal year in order to achieve the 3.5% primary surplus target until 2022. According to Greek financial newspaper “Naftemporiki”, the specific country’s public finances will have to be propped through measures activated at the start of the year, as well as an increase in private consumption, which is related to indirect taxes. This means that while the Greek state collected 27.108 billion euros in indirect taxes in 2015, 29.311 billion in 2016, from 2017 onwards it will have to take in over 30 billion euros for each year.

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0 15

Prime Minister Alexis Tsipras referred to the agreement at Thursday’s Eurogroup in Luxembourg as a “crucial step” towards getting Greece out of its crisis. It may turn out to be the most accurate assessment he has made in a premiership littered with false dawns and costly miscalculations.

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