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Christina Vasilaki: Towards evaluating the implementation of the third programme

Towards evaluating the implementation of the third programme

The four institutions’ representatives in charge of Greece, who are bound to visit Athens this week, will focus on the review of the package of measures which was passed by the Greek Parliament on Friday. This visit paves the way for a series of actions and decisions agreed upon by the Eurogroup, which shall be implemented by the end of the year in order to: a) disburse the €3 bn. yet to be received by Greece as part of the €26 bn. tranche approved in August; b) release the additional funds (up to €15 bn.) provided for in the third programme, which shall be used for the recapitalisation of the Greek banking sector; and c) successfully complete the first review of the new programme, so as initiate the discussion on measures to make the Greek debt sustainable.

The representatives of the creditors, namely Declan Costello (European Commission), Rasmus Refer (ECB), Nicola Giammarioli (ESM) and Delia Velculescu (IMF), are expected to engage in three days of consultations with the Greek authorities this week (Wednesday–Friday). Additionally, the scheduled meeting of the chief economists of the Eurozone Finance Ministries will be held on Wednesday via teleconference, where the institutions will provide relevant information regarding the overall state of implementation of the programme.

The disbursement of the sub-tranche of €2 bn., which is the first milestone according to the sequence of events agreed upon at the Eurogroup, is expected before the end of the month as relevant European sources confirm. According to the same sources, the representatives of the institutions in Athens will examine whether the measures adopted by the Greek Parliament are compatible with the country’s commitments based on the previous memoranda, as well as whether the respective ministries are ready to implement them. After their visit to Athens, the European Commission is expected to publish a relevant “compliance report” within the coming week. The same sources explain that the proportion of commitments included in the Friday omnibus bill of reforms is not accurate. Nevertheless, what is more important under the latest agreement with the institutions, is to proceed to secondary interventions (implementing provisions, regulations, ministerial orders) complementary to measures already approved, which will guarantee their smooth implementation.

Moreover, the discussion on the second set of prerequisites, which is directly linked to the disbursement of the last sub-tranche of €1 bn. (from the August tranche), is bound to start this week and will likely include all pending measures. Nevertheless, apart from the €1 bn., this package will include most of the interventions in the financial sector and will also pave the way for the timely recapitalisation of the Greek banks; thus, Brussels suggests that the package should have been agreed upon over the next two weeks. More specifically, interventions in the property ownership of Greek banks and the measures to tackle non-performing loans are considered necessary in Brussels, so as for the recapitalisation of the Greek banks to proceed smoothly by the end of the year; after all, this is also the desire of the Greek government, which wishes to avoid any discussions on a possible haircut of deposits over €100.000. It should be noted that the Bank Recovery and Resolution Directive (BRRD) will enter into force on 1 January 2016, which inter alia provides for the bail-in of depositors with deposits over €100.000 before using the funds of the bailout programme.

According to the same source, the aim is to offer individuals enough time to express their interest in participating in the resolution of Greek banks, once their situation and exact capital needs have been determined. This way, they hope to decrease the amount of capital to be raised from the additional €15 bn. (apart from the €10 bn. that has already been disbursed) designated for this purpose by the third bailout programme.

As far as the first review is concerned, apart from the two prerequisite packages mentioned above, it is not expected to include many additional interventions, with the exception of the overall reform of the Greek insurance sector. In this context -and with no final decision having been reached- there is a tendency at the level of institutions to decouple the review from the recapitalisation of Greek banks, although the Eurogroup decision of 14 August clearly instructs to complete the disbursement of the remaining funds that may be needed for the resolution of banks “after the first review and no later than 15 November”. The objective is to ensure that the recapitalisation -which has to take place before the end of the year- is secure against possible delays in reforming the insurance system.

Discussion on debt relief put off until later

However, the successful completion of the first review remains a prerequisite for initiating the discussion on the Greek debt, as already defined in the agreement of 12 July. Nevertheless, it remains unclear how long this discussion will last, given that Brussels admits that despite the existing agreement on a settlement, the issue is “politically sensitive” for many countries, particularly for Germany. The situation becomes even more complicated when one considers that the decision on the Greek debt is directly linked to the discussion on the role of the IMF in the third programme, which has also been an issue of much controversy in many countries, not excluding Germany. Notably, the IMF has so far confined itself to the role of technical adviser and does not foresee a loan disbursement to Greece in the near future, unless a decision on debt relief has been reached.

Concerning the settlement of the Greek debt, Eurogroup president Jeroen Dijsselbloem expressed the view that a cap of 15% of GDP on its annual servicing should be put, whereas IMF director Christine Lagarde commented that such a measure would not suffice alone. According to a European official, the problem essentially lies in the fact that the IMF is putting pressure on Greece’s creditors to make an immediate decision on debt relief, while Greece does not face a debt servicing problem until 2023 the least.

More specifically, according to the Greek debt sustainability analysis that was conducted last summer with the consent of all four institutions, the servicing of debt is very low until 2023, rising to an annual 12% of GDP in the decade 2020-2030 and reaching 15% in the coming years. A European official emphasised that nobody can be sure about the state of the Greek economy after one or two decades and whether further interventions will be required, which causes particular problems in decision making. According to the same sources, therefore, we should expect that any discussion after the completion of the review will also include -besides a solution for debt- some kind of safety net for the creditors, such as a new conditionality on debt relief spanning over a period of many years.