On Monday 23 November, the Eurogroup confirmed the smooth progress of the recapitalisation process of the Greek banking sector within the predetermined time frame. The Eurozone Finance Ministers agreed, “following the positive assessment” by the European institutions, that “the Greek authorities have successfully implemented the first set of milestones” which are necessary to support the transfer of funds to the Hellenic Financial Stability Facility (HFSF) from the €10 bn. that has been retained in a special ESM account and earmarked for this purpose.
According to a statement by Eurogroup President Jeroen Dijsselbloem during a press conference, apart from the extensive list of prerequisites, the Greek government has implemented additional significant reforms in the financial sector. Mr. Dijsselbloem also welcomed the commitment by the Greek authorities that the valuation of the commercial value of real estates, in the context of the new Household Insolvency Law, shall be conducted by independent auditors under the supervision of the Bank of Greece.
According to Klaus Regling, Managing Director of the European Stability Mechanism (ESM), the recapitalisation needs of the Greek banks will be significantly less than expected (below €6 bn. according to the Greek government). The official decision to release these funds to the HFSF shall be made by the ESM board of directors in the coming two weeks, on a case-by-case basis following the relevant decisions relating to state aid and upon the final assessment regarding the precise capital needs of each individual bank.
The relevant Eurogroup statement on Greece characteristically mentions that “so far, all of the significant banks have been able to raise sufficient private capital to cover the AQR and baseline scenario, while two of them also for the adverse scenario of the Comprehensive Assessment”.
Greece’s creditors were particularly satisfied with the “good news” from the front of the private sector participation in the recapitalisation of Greek banks, thus offering more time to the government in order to implement the difficult reforms relating mainly to the reform of the pension system.
Nevertheless, they made clear that “the proceeds stemming from the future disposal of the HFSF participations and other capital instruments in the Greek banks, acquired in the context of this recapitalisation exercise, will be used to repay the ESM as soon as such proceeds become available in line with the Eurogroup statement of 14 August”.
Moreover, they pointed out that the Greek government needs to make “further” decisions to address the remaining vulnerabilities of the Greek banking system, “notably those arising from the high level of NPLs”, in order to identify the loans that may be sold to foreign funds. The decision on this particular issue has been postponed until December, as the representatives of the creditors and the Greek authorities failed to reach an agreement within the scope of the first package of reforms.
Future Steps
The Eurogroup of Monday also confirmed the approval of the disbursement of the €2 bn. sub-tranche by the ESM, following the successful completion of the first set of milestones. This amount will be used mainly to service the debt, as well as to repay part of the government debt to the private sector and to co-finance key projects using European funds.
The Greek authorities have committed themselves to complete the second set of prerequisites, which is now at the core of consultations, by mid-December.
According to the institutions’ proposals so far, the second set will include -among others and apart from the final decision on the management of NPLs- changes in the public sector payroll system, as well as some additional tax reforms.
According to the Eurogroup President, however, an essential element of the second set of milestones is the structure of the new Privatisation Fund, whereas he placed the reform of the pension system within the first assessment. As he mentioned on Monday, the assessment is expected to take place in early 2016, and not in late 2015 as envisaged in the initial planning. “To be realistic, I do not see how it could be otherwise,” he pointed out, urging the Greek authorities to avoid further delays.
Finally, as far as the discussion on Greek debt is concerned, which is bound to take place after the completion of the first assessment, once again it was linked with the role of the IMF in the Greek programme. The Eurogroup President stressed that the IMF participated in the meeting via telephone, thus posing specific conditions for its participation in the programme: namely, the reform of the pension system and the meeting of the fiscal targets, which are essential in securing the sustainability of the Greek debt.