Brussels, 03/05/2010 (Agence Europe) - Eurozone finance ministers have decided to activate an unprecedented support plan, which provides assistance to Greece and will help the country obtain finance at below market rates. At the end of the Eurogroup meeting on Sunday 2 May, Jean-Claude Juncker approved the multi-annual economic programme negotiated between the European Commission, European Central Bank (ECB), International Monetary Fund (IMF) and the Greek authorities. Subsequently, the Eurogroup has decided to release a payment of €110 billion over three years. Eurozone member states have promised to provide bilateral loans of up to €80 billion, €30 billion of which will be granted during the first year, with the IMF providing the remainder (€30 billion). This decision may in the long-term enable Greece to return to the markets and ensure stability throughout the eurozone.
A first tranche of the loans will, no matter what, be released before 19 May, the Greek bonds deadline worth €9 billion, confirmed the Eurogroup in a press release. The press statement explains that in countries where approval by the national parliaments is necessary before proceeding to a payment, a decision, nonetheless, will be made soon. This will occur on 7 May in Germany, where a vote is expected to take place at Parliament. Following this, heads of state and government from the eurozone will meet in Brussels on Friday evening “to conclude the entire process and draw the initial conclusions from the crisis affecting Eurozone governance”, announced the president of the European Council, Herman Van Rompuy.
A summit lacking substance? Juncker was relieved at the end of the discussions but did, nonetheless, recognise on Sunday that they had nearly lost their patience along the way. According to Juncker, the sluggish pace of discussions can be explained by the cultural differences between eurozone members, member states' internal procedures and the need to inform the public. Jean-Claude Trichet admitted that “democracies have their own timeframe but what counts is the result”. Juncker stated that ultimately, the decision to provide assistance to Greece had been maintained and they did not have to accept leaders of the EU16 questioning the terms of the agreement. The president of the Eurogroup asserted that “the EU16 are committed to presenting their parliaments with all the legislative instruments required for the mechanism to be activated in all euro zone countries … there is no question that the European Council can revoke this decision”. According to the latter, it would not be unusual that the European Council, which had launched the process, ultimately validates the programme. Although nothing else is expected at a technical level, this summit will, above all, provide an opportunity for examining long-term challenges affecting governance (possible reform of the Stability and Growth Pact preventive chapter and a possible micro-financial assistance mechanism etc.).
Austerity. A large toolkit of measures is contained in the Greek economic plan. This plan also advocates budget cuts and increased taxes to bring down the deficit to below 3% of GDP by the end of 2014. Other measures announced include an increase in VAT, which will rise from 21% to 23%, a 10% tax increase on fuel, alcohol and tobacco, a freeze on public sector wages and pensions and an increase in the minimum retirement age to 60.
George Papaconstantinou, the finance minister, explained that his country was in no sense under tutelage. Although he said that programme implementation would not be easy he did state on a number of occasions that he and his fellow Greeks were determined to carry out the reforms accompanying the programme in full. He acknowledged that “there is no doubt that these measures will be extremely difficult” and pointed out that among the Greek people there was a very clear awareness of the need for change. According to the finance minister, “we have made an enormous effort to not affect public-sector wages or the lowest public and private sector pensions … but it is clear that, in this situation, everyone has to make an effort”. The ECB's governing body welcomed the agreement concluded with the Greek authorities. It also said that it was essential that the Greek authorities remain prepared to take additional measures if necessary to accomplish the programme in full. According to the agreements concluded this weekend, Greece will have to bring down its budget deficit from 13.6% to 8.1% of GDP in 2010, then to 7.6% in 2011 and 6.5% in 2012. A two-year extension was granted to the country to get back under the Stability Pact threshold (by 2014), when the debt is expected to fall, following a peak of almost 150% of GDP in 2013. The essential part of the austerity programme is expected to be approved this week by the Greek parliament, which was called on to tackle a matter this Monday.
Strict conditions attached. There will be strict conditions attached to the European aid, explained Juncker, pointing out that the conditions would be set up on a Council of Ministers' decision to be adopted in the next few days, based on Articles 126 and 136 of the Treaty on the Functioning of the European Union, and set out in detail in a Memorandum of Understanding between Greece and the Commission. The Commission will publish a draft Council of Ministers' decision, probably on Tuesday 4 May, setting out the economic policy conditions for the aid package until 31 December 2011.
Interest rates for eurozone member states' loans to Greece are expected to be in the region of 5%, commented EU Economic and Monetary Affairs Commissioner Olli Rehn, and will be calculated as already specified (see EUROPE 10116). Money will be paid out from the fund if the Greek government meets its pledges and this will be assessed in quarterly reports, explained Rehn, adding that the first assessment would be made before the summer break. Technically, unanimous voting will required at the Eurogroup on the release of the various lump sums from the loan package (based on the Commission's quarterly reports), but in practice, it is decision by consensus that is being promoted to ensure that no member states are forced to participate and no member states can veto its partners' payment of aid. The IMF will make its own assessment of the situation but its assessment will be the same as the Commission's and therefore will not lead to different decisions on whether or not the next lump sum should be paid, argued Commission sources on Monday.
The first loan payment will be authorised by 15 May although the actual scale of it has not yet been officially decided. All the various segments of the loan will last 3 years, meaning that Greece will be borrowing using this “mixed mechanism” until December 2013 (when the aid programme comes to an end) and will have paid all the money back by 31 December 2016. Member states can lend money to Greece at fixed or variable interest rates, as they see fit, but the Commission will cover the entire sum into a fixed-rate loan. The exact size of the different segments of the loan has not yet been decided but the segments will not necessarily be of the same size because the idea is to help meet Greece's borrowing needs in line with changes in the market situation.
Credibility. The aid plan has been designed to give Greece an 18-month breathing space when it can avoid being forced to go back to the money markets to borrow money, but if things go according to plan, it will have restored enough credibility to be able to borrow from the markets again in 2011, according to sources at the Commission (which would mean that not all the segments of the loan deal would need to be paid out). This at least is the idea behind the design of the aid package, whose designers hope that when they see significant commitments by the Greek authorities and the other institutions involved, that private banks and credit rating agencies will gradually increase Greece's rating and enable it to borrow money again at affordable interest rates.
The EU economic and monetary affairs commissioner said that €10 billion of the total €110 billion might be used to set up a new financial stability fund if there is need to stabilise Greek banks. The fund could be used to increase Greek banks' capital if they have problems raising cash on the money markets.
Solidarity. No eurozone member state will lose out. If a country contributing to the Greek aid programme should itself be downgraded and therefore be forced to borrow money at higher interest rates than those at which it is lending money to Greece (as might happen to Portugal, for example), then the difference in interest rates would be covered because it would be divided up among all the eurozone member states. In practice, a country's net loss would be deducted from the total profits made by member states by borrowing at interest rates lower than that at which they lend on to Greece. Any remaining “profits” would be shared out among the eurozone member states on a pro rata basis in line with the amount of money it is lending to Greece (itself decided in line with the member state in question's share of ECB capital). (A.B./transl.fl)