Greece is entering a new period of uncertainty, which is expected to last until December at least. As it was made obvious in the meeting of the Eurogroup, which was hosted in Luxemburg (14-10-2013), the pending issues pose a serious problem to the government of Athens and they could potentially lead to political developments in the coming months.
More specifically: the fourth assessment of the second Greek Programme is frozen, as the Troika estimates that additional budgetary measures are needed, amounting to two billion euros, in order for the primary budget surplus of 2014 to be consolidated at levels that lead to a substantial reduction of public debt. This “substantial fiscal gap”, as it was characterized by the member of the Executive Board of the European Central Bank (ECB), Jörg Asmussen, is due to the fact that, on the one hand not all austerity measures planned for 2013 were implemented, while on the other hand the benefits expected from restructuring the tax administration of the country were lower than expected; furthermore, excesses are also expected in social spending (social security, health). We should recall the government’s commitment, expressed both by the finance minister, Ioannis Stournaras, and on a number of occasions by the prime minister, Antonis Samaras, to abstain from taking further measures. Against this background, the question arises as to how the mission of the Troika is going to be completed, given that this is an essential precondition for discussions on further support to Greece to begin, as the president of the Eurogroup, Jeroen Dijsselbloem, also confirmed. It is worth mentioning that Mr. Stournaras told reporters in Luxemburg that he denies the existence of a substantial budget gap.
The second problem facing the Greek government, which was revealed in a most unambiguous manner in Luxemburg, is ECB’s resistance to consent to Athens’ aspiration for solutions intended to meet the financial needs of Greece without a new Memorandum. More specifically, based on the calculations of Athens, in order to avoid a new loan agreement, a roll-over of bond maturities held by the central banks of the Eurozone (ANFAs), and/or the Greek commercial banks (bonds issued in the context of a support programme to the financial sector, during the tenure of Mr. Alogoskoufis in the Ministry of Finance in 2008) is needed. Nevertheless, Frankfurt disagrees with both of these solutions, arguing that a roll-over of ANFAs would be equivalent to direct state funding from the Eurosystem and thus, prohibited by the European Treaties, while the roll-over of bonds held by Greek banks would create a problem in their capital position. Speaking to reporters after the meeting of the Eurogroup, Mr. Stournaras declared that Greece will ask for measures “equivalent” to a roll-over, although the exact meaning of this statement is not yet clear. However, in the current context, Greece is heading towards a third Memorandum, even if a temporary solution to the financing needs of 2014 is found, through the use of any unallocated funds from the Hellenic Financial Stability Fund. Substantive decisions are expected to be made from December onwards, when the exact financing needs of the country and its banks will be determined on the basis of a Troika assessment.
Progress in the Eurozone
Meanwhile, progress is evident in the remaining issues facing the Eurozone, although the Eurogroup of Luxemburg did no more than simply ratify already known developments, in anticipation of the formation of a government in Germany. In particular, it was made official that Spain and Ireland are bound to exit the European Support Mechanism by the end of the year (in the case of Spain, European loans were limited to its banking system). The question that arises, then, is whether the European Stability Mechanism (ESM) will agree to provide a “line of credit” to Ireland (precautionary programme), by purchasing its bonds in the primary market, in case of insufficient interest from private investors at attractive prices. Final decisions are expected to be reached in November, with the aim being to “allow Ireland to return to the markets on a permanent and sustainable basis”, as emphasised by the President of the Eurogroup.
The situation in Portugal is more complex, though; despite progress in the front of exports and restoration of competitiveness, further fiscal adjustment is faced with strong political resistance as it requires additional austerity measures. Notably, the assessment of the Portuguese Programme in the Summer of 2013 has been postponed, an unprecedented development for countries in a conditionality programme, excluding Greece. The Programme for Portugal ends in mid-2014, which means that the debate on whether a new programme will be needed will begin early next year.
Finally, the EU finance ministers (ECOFIN), who also held a meeting in Brussels on the day after the Eurogroup, ratified the launch of the Single Supervisory Mechanism for banks under the auspices of the ECB. This is the first pillar of a banking union in Europe. However, disagreements still exist over the second pillar, i.e. the single resolution mechanism for banks. Germany argues that conferring the competency of placing a European bank under liquidation on the Commission, is contrary to both German and European law. Moreover, although there has been substantial agreement on the use of public funds by the ESM, as a measure of last resort, for funding the liquidations of Eurozone banks, there still remains the question of what is to be done with the countries that participate in the banking union but not in the Eurozone and, thus, have no access to the funds of the ESM.