OREANDA-NEWS. The agreement reached between Greece and its eurozone creditors reduces the risk of another Greek liquidity crisis this summer, and incentivises the country to complete its third bail-out programme, Fitch Ratings says. However, with little debt relief offered upfront, the Greek government may find it progressively more difficult to continue with politically controversial measures required to meet ambitious programme commitments. Implementation risk therefore remains high.

The Eurogroup on Wednesday confirmed the approval of the EUR10.3bn second tranche of bailout funds from the European Stability Mechanism (ESM) to Greece. Subject to final verification of measures recently adopted by the Greek parliament, the first sub-tranche of EUR7.5bn will be disbursed in June. The remainder of the second tranche will be disbursed "after the summer" but only if progress is made with arrears clearance and privatisation.

The June disbursement will cover EUR3.0bn of debt repayments to the IMF and ECB due in June and July, which was the main financing hurdle for 2016. The next major repayments to the ECB are in April 2017, and the IMF repayment schedule will be less onerous in 2017 as the original 2010-2012 programme is paid off at the end of this year.

The agreement highlights the improved relations between Greece and its official creditors since last summer's often confrontational negotiations leading up to the current ESM programme. The Greek government has implemented prior actions, including pension reform and a contentious requirement for additional fiscal contingency measures to safeguard the 2018 budget target.

For their part, Greece's official creditors have agreed to possible debt relief (nominal haircuts are still excluded). The Eurogroup will assess debt sustainability with a view to keeping gross financing needs (GFN) "below 15% of GDP during the post programme period for the medium term, and below 20% of GDP thereafter." However, despite the front-loading of the ESM programme's conditionality, Eurogroup President Jeroen Dijsselbloem has said that medium and long-term debt relief measures, if needed, "will be delivered at the end of the progamme, [in] mid-2018."

Upfront debt relief measures would be based on lowering interest rates on existing loans and some smoothing of EFSF repayments, keeping their average maturity unchanged. More sizeable medium-term measures include restarting disbursement of profits on Greek bonds held by the ECB, partial early refinancing of relatively expensive IMF loans by the ESM, and possible further EFSF relief (interest rate caps, coupon deferrals and maturity extensions are all mentioned). This latter set of measures would occur only upon successful completion of the ESM programme, which requires Greece to reach a primary surplus of 3.5% of GDP by 2018.

Delivering debt relief in stages and contingent on programme performance could incentivise the Greek authorities to meet programme targets. However, given the track record of slippage under previous programmes in the past five years, we think there is still a high risk that the 2018 surplus target will be missed despite the agreement on a contingency fiscal mechanism. This risk could increase if the conditionality in Wednesday's agreement meant that sizeable debt relief came to be seen by Greek politicians or the public as a distant or unattainable prospect.

A question mark is therefore likely to remain over the sustainability of Greek debt in the medium term. While gross financing needs are modest over the next few years, substantial increases in gross financing requirements would follow in the long term without further debt re-profiling.

Our 'CCC' sovereign rating, which we affirmed in March, reflects risks to programme implementation and debt sustainability.