OREANDA-NEWS. The additional disbursement of Greek bailout funding agreed on Monday highlights the improvement in relations with official creditors this year, as well as the continuing challenges to programme implementation, Fitch Ratings says.

The Eurogroup said yesterday that the Greek authorities' implementation of 15 milestones in areas such as privatisation reform and bank governance had paved the way for Greece to receive EUR1.1bn from the European Stability Mechanism (ESM) for debt servicing. A further EUR1.7bn should be disbursed shortly, to be used for further arrears clearance. Arrears repayment also supports private consumption, contributing to our forecast of a moderate pick-up in GDP later this year, followed by growth of 1.8% in 2017.

The combined payments of EUR2.8bn will complete the disbursement of the EUR10.3bn second tranche of ESM bailout funds originally approved under the first programme review in May. The latest approval demonstrates that relations between Greece and its official creditors remain on a firmer footing than in 2015, particularly in view of the highly front-loaded policy conditionality of the ESM programme.

However, progress in meeting the milestones has been slower than expected, even though they are less demanding than the earlier measures required under the first programme review, such as pension and income tax reform. We think this reflects the Greek government's competing policy priorities and relatively weak domestic political ownership of the programme.

The majority of the milestones were legislated over the last month, in a single bill, with the earlier delay underlining the government's slim majority and ideological opposition in parliament to some programme reforms.

The focus can now turn to the second programme review (due to commence later this month), of which labour market reform is likely to be the most contentions component. We estimate that the government has sufficient buffers (including possible new arrears build-up) to fund itself into 2Q17. This increases the likelihood that negotiations around the second review slip into next year.

The risk that the programme goes off track remains high, as we noted when we affirmed Greece's 'CCC' sovereign rating in September. Primary budget surplus targets (1.75% of GDP in 2017 and 3.5% in 2018) will be progressively harder to meet. The prospect of government debt relief could become an important driver of programme compliance if it incentivises the Greek authorities to meet programme conditions. However, we think it could have the opposite effect if the Greek government and population come to view substantial debt relief as distant or unlikely.