Brussels, 13/07/2015 (Agence Europe) - After 17 hours of negotiations, the eurozone leaders reached a unanimous agreement in principle, on Monday 13 July, paving the way for talks to be launched on a third three-year bailout plan for Greece, on the condition that Athens “immediately” adopts decisive measures to rebuild the trust of its creditors.
This political decision removes, for the short term at least, fears of even a temporary departure of Greece from the eurozone - or 'Grexit' - an idea which was openly discussed over the weekend at Eurogroup level by certain ministers from the northern European creditor countries, including Germany and Finland.
“Negotiations will start on an assistance plan under the European Stability Mechanism” (ESM), which will ensure continuity of European financial support to Greece, announced President of the European Council Donald Tusk. He reiterated that “strict conditions must be complied with”, such as the approval of the national parliaments, including the Greek parliament. Describing the agreement as “laborious”, Jean-Claude Juncker stressed that the European Commission, of which he is the president, has lined up against Greece leaving the eurozone from the very beginning.
“Today's decision will allow financial stability in Greece to be maintained and give us recovery opportunities”, said Greek Prime Minister Alexis Tsipras after the summit. He stated that the agreed measures will be recessive in nature, but will be divided more fairly between the citizens. And the package of €35 billion in investment put forward by the European Commission and the promises related to the restructuring of the debt will “show the markets and investors that the possibility of a Grexit is a thing of the past”, the head of the Syriza movement added.
Franco-German alliance on manoeuvre. As is always the case at crisis summits, Germany and France - the two largest economies of the eurozone - played the role of the driving force for the negotiations, most notably at several limited-format meetings with Greece. Paris, which is sympathetic to the Greek demands, drew on its persuasive capacities to reassure Germany, which was keen to secure as many guarantees as possible in order to be able to win over the German parliamentarians who are unconvinced by the need to draw up a third bailout plan for Greece.
“With this unanimous vote, we have paved the way for an ESM programme. We have laid down the conditions to be able to recommend to the Bundestag that we open negotiations. We have found a solution in which the advantages win out over the disadvantages”, said German Chancellor Angela Merkel, who added: “I have spent many hours with Mr Hollande and Mr Tusk, in a limited committee with Mr Tsipras. Mr Hollande has done likewise. At the end of the day, it was something jointly with the Seventeen. France has played an extremely important role. And so has Germany”.
According to Merkel, there is “no need for 'plan B'” - in other words, a 'Grexit' - because “'plan A' has succeeded”. “It was not understood that this 'plan B' could only have come about if Greece had wanted it to. (However), Greece has always said that it wanted to stay in the eurozone. This is why we lay down very strict conditions”, she added.
“If there had been a 'Grexit', what would people have said? That Europe is incapable of taking its responsibilities”, said French President François Hollande, who added that the eurozone summit was “never as tense as it was on the issue of refugees” at the June European summit (see EUROPE 11343). He noted that in exchange for the tough package of reforms requested, Greece would receive “nearly €80 billion” in financial support from the ESM and the IMF in particular, “€35 billion” of investments from the EU budget and “short-term financing to bridge the gap”.
According to Austrian Chancellor Werner Faymann, the possibility of Greece leaving the eurozone was “immediately discounted”. “The aim was never to humiliate a country”, he stressed, pointing out that “the EU has won a Nobel Prize for respecting human rights”. “Certain countries wanted to keep in place the possibility of a Grexit, but this was fortunately not what was decided”, said Belgian Prime Minister Charles Michel.
The agreement was generally met with relief at the European Parliament by the representatives of the social partners, and by the European financial markets. The ECB had to maintain the status quo in its operations to grant emergency liquidity (ELA) to the Greek banks at least until 20 July, when Athens is due to pay it back a total of €4.2 billion.
A path still strewn with obstacles. The journey to the conclusion of a third bailout plan between Athens and its creditors has required some tough choices. Before the agreement of the eurozone summit was even made official, the party of Independent Greeks (right-wing nationalists) expressed its deep discontent, casting doubts on the long-term solidity of the government coalition. The most radical fringe of the Syriza movement is itself reported to have struggled to swallow the conditional measures required by Europe, whereas the parties New Democracy (Christian Democrat), PASOK (Socialist) and To Potami (centrist) will back them.
The trajectory which has been outlined also calls for an extremely tight timeline. In order to “rebuild confidence”, Greece has undertaken to legislate “without delay” on an initial series of measures on: - by 15 July: rationalising the VAT regime and expanding the tax base, measures to improve the long-term viability of the pensions system, the full implementation of the 'budgetary pact' to reinforce budgetary discipline; - by 22 July: the adoption of the civil procedure code and the transposition of the BRRD directive on the national bank restructuring schemes.
The eurozone finance ministers will meet “Wednesday, Thursday or Friday” to take stock of the measures adopted in Greece and, if all goes to plan, officially to launch negotiations on a bailout plan under the ESM, the president of the Eurogroup, Jeroen Dijsselbloem, announced, adding that the negotiations were likely to go on for “several weeks”.
Additionally, it is absolutely vital to secure bridge financing by Monday 20 July to avoid any further payment issues, following the one at the end of June when Athens was unable to pay back €1.6 billion to the IMF. Of a total funding requirement which has been put at between “€82 and 86 billion”, the 'institutions' (Commission, ECB and IMF) have estimated the immediate reimbursement requirements at €12 billion (€7 billion on 20 July and €5 billion in mid-August). It was this vital element that the Eurogroup, meeting again on Monday (see other article), got to work on, on the basis of specific documents of the 'institutions' (see EUROPE 11357).
Finally, and completely without precedent, the creditors of Athens have asked it to change certain laws adopted since Syriza came to power which constitute “a step backwards from the commitments taken under the previous programme”. Only the famous “law on the humanitarian crisis”, which was adopted by the Greek government in the spring, will be spared.
Debt rescheduling anticipated. The leaders of the eurozone state that in the framework of a possible ESM aid plan and in line with the 2012 declaration of the finance ministers of the eurozone, the Eurogroup is prepared to consider, if necessary and if Greece sticks to its commitments, additional measures to reschedule the Greek debt. Amongst other things, an extension of the grace periods and repayment dates could be considered, in order to ensure that the “gross financial requirements remain at a sustainable level”.
The declaration of the eurozone leaders does, however, contain one red line: “nominal haircuts on the debt cannot be undertaken”.
“A door has been opened today”, said Belgian Prime Minister Charles Michel. A commitment has been made and possibly, after the summer or at the end of the year at the latest, following the assessment of the 'institutions', there will be “a discussion on the debt, a rescheduling of the deadlines for instance”, he added.
The objectives laid down in the Eurogroup declaration of November 2012 provided for the debt to GDP ratio to reach 124% in 2020 and fall substantially below 110% in 2022. However, the most optimistic forecasts of the 'institutions' put this ratio at 165% of GDP in 2020, 150% in 2022 and 111% in 2030.
As far as the IMF is concerned, public debt is deemed liable if the ratio of gross financing needs to GDP is below 15%, but, as the 'institutions' note, it is hard to calculate a debt to GDP ratio beyond which a debt is no longer viable. The nature of the Greek debt makes it unique (mostly held by the institutional sector, long majorities, low interest rates). The debt to GDP ratio is not enough to judge the viability of the debt, the ESM boss, Klaus Regling, explained.
New management fund for Greek assets. As well as the adoption of “ambitious” measures to modernise public administration and reform the pensions regime, the employment market and the energy and goods markets, the eurozone declaration refers to the creation of an “independent fund” which will monetise €50 billion in Greek assets over three years, “through privatisations and other means”.
The resources this will generate will make it possible to pay €25 billion for the repayment of the recapitalisation of banks. Half of the remaining €25 billion will be used for “decreasing the debt to GDP ratio” and the remaining half for “investments”. Merkel stated that the creation of this fund would help to ensure the “sustainability of the debt”.
The size, purpose and details for the constitution of this fund were a stumbling point in the talks. Athens, supported by Italy, saw it as an affront to its sovereignty. “I made it quite clear that if a fund was to be set up with assets from Greece, we could not even consider establishing it in Luxembourg, because that would have been seen as a humiliation”, said Italian Prime Minister Matteo Renzi.
Ultimately, the fund “would be established in Greece and be managed by the Greek authorities under the supervision of the relevant European institutions”, the eurozone summit declaration reads.
IMF involvement on the record. Tsipras fought to the last minute to oppose the involvement of the IMF in the future Greek bailout plan. “This was a sensitive issue for the Greeks, but it was an extremely important option for other countries”, Michel said. “Clearly, the sticking points were the involvement of the IMF and the €50 billion fund”, said Irish Prime Minister Enda Kenny.
The involvement of the IMF is a “precondition for the Eurogroup to agree on a new ESM programme” and “Greece will request continued IMF support (monitoring and financing) from March 2016”, eurozone leaders stress. (MB with AN, EL, IL, SP & PH)