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Nikos Chrysoloras: The Eurogroup of Temporary Solutions

The financing of the Greek economy in the next three months will continue uninterrupted, at least barring any unforeseen event, after the political decision reached by the Eurogroup that was held in Brussels, with regard to the disbursement of the remaining installments totaling € 6,8 billion. Nevertheless, the issues concerning the medium-term sustainability of the Greek debt, the funding gap in the Greek program that might arise in the second half of 2014, as well as the rollover of Greek bonds held by the central banks of the Eurozone (ANFAs), have been postponed for the coming autumn, after the German elections. At the same time, the Greek government is still faced with difficulties in restructuring the public sector which, according to the Memorandum, includes mandatory staff layoffs, while the fate of the Bank of Cyprus, in combination with the crisis in Portugal and the continued recession in the Eurozone, have refuted those who were quick to ascertain that “the worst is behind us”.

Greece

After the completion of the evaluation by the Troika, literally at the eleventh hour and before the meeting of the finance ministers of the Eurozone, the Eurogroup has paved the way for the disbursement of the next tranches to Greece, provided that the latter remains faithful to its specific prerequisite commitments. As it was made clear by the Greek finance minister, Mr. Ioannis Stournaras, during a press conference in Brussels, the Troika will decide -within the coming ten days- on the feasibility of V.A.T. reduction in food services and, given that an agreement is reached, the measure will apply from August 1st onwards. Moreover, the Greek government claims that it averted a levy on the turnover of enterprises to cover the deficit of the O.A.E.E. (Freelancers’ Insurance Organization), while also avoiding a reduction of pensions and uniformed services employees. In return, the luxury tax will be enforced in the immediate future, i.e. one year earlier than initially planned.

The program of disbursement of installments is as follows: after the enactment of the multi-bill introduced by the ministry of finance, which has been submitted to Parliament for the fulfillment of prerequisites, which mainly involve the deficit of E.O.P.Y.Y. (national organization for the provision of health services) and privatizations, the Council of Experts of the Eurogroup (E.W.G.) is bound to convene on July 19, in order to approve the disbursement of € 2,5 billion from the European Financial Stability Facility (E.F.S.F.). The E.F.S.F. will also disburse another € 1,5 billion, which is currently held in a special account and is part of the profits of the central banks of the Eurozone, in the context of the Greek bonds portfolio held by them under the Securities Markets Program (S.M.P.). In other words, the total amount that will be directed to the Greek economy will amount to € 4 billion. Then, a meeting of the Board of the International Monetary Fund has been planned for the end of July, unless something extraordinary takes place, in order to approve the disbursement of € 1,8 billion to Greece.

However, September is expected to present new difficulties, when the mission of the Troika is expected to return to Greece. By that time, the mobility of 12,500 civil servants in the public sector has to be implemented, along with the completion of restructuring of E.L.V.O. (Greek Vehicle Industry), E.A.S. (Greek Defense Systems) and L.A.R.K.O. (General Mining and Metallurgical Company), the repayment of public debt towards E.Y.A.Th. (Athens Water Supply and Sewerage of Thessaloniki S.A.) and E.Y.D.A.P. (Water Supply and Sewerage Company) and the adoption of the new code of conduct for lawyers. These actions will, in turn, allow the disbursement of another billion from the E.F.S.F. in October, of which 500 million  will come from the S.M.P. Finally, in light of the next evaluation, Greece has to fit another 12,500 employees into the regime of mobility (total 25,000 within 2013).

These installments suffice to meet the needs of the country until the end of October. Although the plans until Monday morning provided for the disbursement of € 4,8 billion from the E.F.S.F. (instead of the € 3 billion that was finally agreed), so as to cover the needs of Greece for a longer period, no progress was made due to the reaction of Germany. Berlin argued that a higher installment would constitute an “alteration of the Greek Program” and called for an approval by the Plennum of the German Parliament (Bundestag).

Notably, both Mr. Stournaras and the heads of the Eurogroup, Jeroen Dijssebloem, and the I,M.F., Christine Lagarde, denied the possibility of a funding gap in the Greek program in the second half of 2014, which would cause the Fund to discontinue the provision of installments to our country after August 2013. Messrs. Dijssebloem and Stournaras reaffirmed that “in case there is such a gap” and “Greece remains faithful to its obligations”, then it (the gap) will be discussed and covered in due course. In addition, the officials refused to go into details concerning the refusal of some central banks of the Eurozone to roll over the Greek bonds in their investment portfolios (ANFAs). “The issue concerns our partners and not Greece, and I believe that it will be settled like the issue of S.M.P. was settled”, was the mere answer of the Greek finance minister.

Finally, both in the official announcement of the Eurogroup, and in the positions of Mr. Dijssebloem, Ms. Lagarde and Mr. Olli Rehn, Deputy Chairperson of the European Commission, there was warm praise for the financial performance of Greece and the restoration of competitiveness. However, there were also promptings to accelerate structural reforms in the public sector, the goods and services market and the tax collection mechanism. To sum up, it is worth noting that, according to Mr. Dijssebloem, “all indications suggest that the Greek economy will return to growth rates from 2014 onwards”.

Cyprus

The issue of Cyprus was not high in the agenda of yesterday’s meeting of the Eurogroup, while the issue of Greece was dominant. After the meeting, the head of the body, Jeroen Dijssebloem, merely welcomed the successful shift (roll over) of public debt worth € 1 billion, which was in the possession of Cypriot banks, and postponed any decisions for September, when the finance ministers of the Eurozone are bound to meet in Vilnius. Nevertheless, July 17 will mark the “Golgotha” for Cyprus, which translates into quarterly evaluation and updating of the Memorandum by the Troika. “Last time I responded to the letter of the President, Mr. Anastasiadis [for the revision of the Memorandum], where I stressed how important it is to implement the agreed program”, recalled Mr. Dijssebloem intelligently. At the same time, the government of Cyprus admits the existence of open fronts regarding prerequisite actions, a few days before the start of the evaluation process.

Of course, the “elephant in the room” of the Cyprus crisis is the fate of the Bank of Cyprus, which is losing its deposits despite the existence of limitations on movement of capital, whereas its sustainability is threatened by the burden of its € 9 billion debt to the E.C.B., which resulted from merging with the -now bankrupt- Laiki Bank. Nicosia hopes that the issue of restructuring the debt -worth € 9 billion- of the Bank of Cyprus towards the E.L.A. of the Eurosystem, will be examined in a positive mood on the side of Brussels and Frankfurt, once the plan of restructuring of the Bank is complete.

Eurozone Economy

During the meeting of the Eurogroup, the International Monetary Fund presented its recommendations for the economy of the Eurozone (Article IV Consultation). When introducing her report, the director of the Fund, Ms. Christine Lagarde, suggested -among others- that banking consolidation is accelerated and restrictive economic policies become more “flexible”. Ms. Lagarde pointed out that the major challenge for Europe is to return to positive growth rates and to create more jobs. “Despite progress at the individual level, the Eurozone is not growing, whereas unemployment is rising”.

The suggestions of the Fund are based on four pillars: concerning fiscal adjustment, “further flexibility may well be necessary, especially in case that room is needed for the recapitalization of banks and promotion of structural reforms. If growth remains weak, the time-extensions offered for the reduction of the deficit could be insufficient as well,” as stressed by the authors of the report. Additionally, Ms. Lagarde called the European Central Bank to intervene more vigorously to increase the liquidity of the economy, even using “unconventional means,” such as provision of liquidity to European banks secured against loans to S.M.Es., or direct purchase of investment products based on S.M.Es’ loans.

Lastly, the IMF recommends the completion of banking consolidation, and especially of the legal framework for the Single Resolution Mechanism (S.R.M.) to resolve EU banks. In any case, the continuation of structural reforms in member-states is necessary, as indicated by the Fund, whereas the high levels of debt do not allow for expansionary fiscal policies in most member-states of the Eurozone.

Portugal – Latvia

The finance ministers of the Eurozone viewed the defuse of the political crisis in Portugal with relief, with the head of the Eurogroup, Mr. Dijssebloem, repeatedly emphasizing the need for stability in the country and for continuation of reforms, during the press conference that ensued.

Finally, at the E.C.O.F.I.N. (Council of Economic Affairs of the EU), the integration of Latvia into the Eurozone on January 1, 2014, was reiterated,.