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History: EU’s first two programs

The Eurogroup in 2010 agreed to provide bilateral loans pooled by the Commission (so-called "Greek Loan Facility", GLF) for a total amount of € 80 bn. This amount was eventually reduced by € 2.7 bn, because Slovakia decided not to participate in the GLF, while Ireland and Portugal stepped down from the facility as they requested financial assistance themselves.

The financial assistance agreed by euro area states was part of a joint package, with the IMF committing an additional € 30 bn under a stand-by arrangement (SBA).

Thus, euro area states eventually disbursed € 52.9 bn under the first program (some say that the real support exceeded € 110 bn).  

Through the second program, the euro states in 2012, via the European Financial Stability Facility (EFSF), committed € 144.6 bn to Greece. This amount included undisbursed funds from the GLF/first program. The IMF committed around € 19.8 bn for the second program.

Actually, the second program’s final amount was at about €131 bn (some say that in reality the “second” loan reached € 172 bn).

Thus, according to alternative calculations, the total support program for Greece reached an enormous amount of € 368 bn.

The third program

The third economic adjustment program for Greece officially starts with the signature of the Memorandum of Understanding (MoU) and lasts for three years. It started on the day of signing, i.e. on 19 August 2015 and runs until August 2018.

The Memorandum of Understanding (MoU) lists in detail the conditionality attached to the financial assistance, i.e. the measures and reforms Greece committed to undertake in order to address its economic and social challenges.

On 11 August 2015, the European Commission, the European Central Bank (ECB) and the European Stability Mechanism (ESM), with the input of the International Monetary Fund (IMF), reached a comprehensive agreement at staff level with the Greek authorities on the MoU.

It was subsequently endorsed by the Greek Parliament and by the euro area Finance Ministers. The reform agenda anchored in the MoU is built around four pillars: restoring fiscal sustainability, safeguarding financial stability, enhancing competitiveness and growth, and modernising the State and the Public Administration.

The financing envelope and money provision

The financing envelope for the duration of the program amounts to up to € 86 bn. This is made up of a buffer of up to € 25 bn to address potential bank recapitalisation and resolution costs. The ESM could provide up to € 86 bn, i.e. it could in principle fully finance the program.

However, this does not automatically mean that the ESM will have to fully cover the financing of the program. For instance, if the IMF decides to participate in the program, its contribution will reduce the amount provided by the ESM. Likewise, the return by Member States of profits related to the bonds bought as part of the Securities Market Program (SMP) and a return of Greece to the financial markets during the program period – as it happened in 2014 – could reduce financing needs.

The money provided through European Financial Stabilisation Mechanism (EFSM) included in the envelope of € 86 bn is to be paid back plus a so-called bridge loan of € 7bln. 

The first tranche of the program

The first tranche under the ESM program revealed by the Eurogroup’s statement (14 August 2015) amounts to € 26 bn and consists of two sub-tranches. The first sub-tranche of € 10 bn will be made available immediately in a segregated account at the ESM for bank recapitalisation and resolution purposes.

The second sub-tranche of € 16 bn will be disbursed to Greece in several installments, starting with a first disbursement of € 13 bn by 20 August 2015, followed by one or more disbursements in the autumn subject to the implementation of additional key milestones based on measures outlined in the MoU.

The first tranche is expected to give a stimulus to the Greek economy. Earmarking € 10 bn for the financial sector is crucial to pave the way for the eventual lifting of capital controls, which are currently weighing on the economic recovery.

The large arrears the Greek state has with the private sector are another hindrance for economic activity. Besides the reimbursement of the EFSM bridge loan (€ 7 bn) and the ECB debt redemption (€ 3 bn), parts of the remaining € 16 bn of the first tranche are foreseen for the clearance of arrears. In addition, part of the money is envisaged to cover the current financing needs of the Greek state. This is crucial since the recent weakening of the economy took its toll on state finances.

ESM’s facility

The ESM has an overall lending capacity of € 500 bn and is backed by paid-in capital of € 80 bn and committed callable capital of € 620 bn. Its remaining lending capacity is around € 455 bn. Therefore, lending activities linked to the program for Greece do not require any new financial engagement by euro area member states.

The ESM raises the funds – which will then be lent-on to Greece – on the financial markets without any rerouting to euro area member states, which means that there is no impact on national debt ratios.

As to the IMF’s participation in the program, the IMF has two roles in relation with Greece: firstly, it is a partner in the ESM program as envisaged under the specific arrangements in the ESM Treaty. In this capacity, the IMF has confirmed that it has assisted in preparing the program and it continues to support the process. The IMF will also take part in the regular review missions where program implementation is monitored. Secondly, as regards involvement in the financing, the IMF’s management recommend to the Executive Board to consider further financial support for Greece once two conditions are fulfilled: firstly, the full specification of fiscal, structural and financial sector reforms must be completed; secondly, the need for additional measures has to have been considered and an agreement on possible debt relief to ensure debt sustainability must have been reached.

Decision on debt sustainability

The Commission, in liaison with the ECB, conducted a debt sustainability analysis which concluded that debt sustainability can be achieved through a credible reform program and additional debt related measures without a nominal haircut.

In line with the Euro Summit statement of 12 July 2015, the Eurogroup reiterated on 14 August that it stands ready to consider possible additional measures (for example longer grace and repayment periods) aiming at ensuring that Greece's gross financing needs remain at a sustainable level.

These measures will be conditional upon full implementation of the measures agreed in the ESM program and will be considered after the first positive completion of a program’s review.

The Commission, in liaison with the ECB and, wherever possible the IMF, will monitor Greece's progress in implementing the reform program. The conditionality of the program will be updated on a quarterly basis, taking into account the progress achieved. This will be done on the basis of review missions to Athens, the first of which is planned for this autumn. Greece has committed to fully cooperate with the institutions and to provide them with all the information necessary for the monitoring of the program.

The new fiscal adjustment path

The new fiscal adjustment path set out in the MoU foresees primary balance targets of –¼% of GDP in 2015, 0.5% in 2016, 1¾% in 2017, and 3.5% in 2018 and beyond. The trajectory of the fiscal targets is consistent with the expected growth rates of the Greek economy as it recovers from its deepest recorded recession.

Greece shall target a medium-term primary surplus of 3.5% of GDP. This shall be achieved through a combination of upfront fiscal reforms, for example relating to the Greek VAT and pension system, an ambitious program to strengthen tax compliance and public financial management, beefing up the fight against tax evasion and structural reforms to underpin growth – while ensuring adequate protection of vulnerable groups.

The EU institutions are pushing heavily for a primary surplus, which means that state revenues will exceed spending (except for interest on debt). If this is achieved, the state no longer lives beyond its means and is able to reduce the stock of its debt. A primary surplus is therefore crucial to restore fiscal sustainability and return the economy to sustainable growth.

Under the previous economic adjustment programs Greece moved from a primary deficit of 10.3% in 2009 to a primary surplus of 0.4% in 2014. Well into the second half of 2014, the fiscal program had been on track and over-performing.

However, uncertainty before and after the elections, conflicting announcements about changes in the tax-collection framework, and a weakening of the economy then all led to a marked deterioration of the overall fiscal position.

Projections for Greece’s GDP growth

The Commission updated its forecast for Greece in August 2015: GDP will fall by –2.3 % in 2015, by –1.3 % in 2016, and to return to positive growth of 2.7 % in 2017 and 3.1 % in 2018.The projections assume that growth will recover by the beginning of 2016 in quarterly terms, as the current uncertainty will be resolved quickly after the agreement of the new three-year adjustment program and due to a gradual softening of the capital controls for most business activity by the second half of 2016, accompanied with a swift bank recapitalisation by end-2015. The fiscal measures envisaged in the MoU (including the VAT reform which has been already adopted) are taken into account in the above projections.

Privatisation proceeds envisaged in the program

To preserve the on-going privatisation process and maintain investor interest in key tenders, Greece commits to proceed with the on-going privatisation program. The implementation of this program aims to generate annual proceeds (excluding bank shares) of €1.4 bn in 2015, € 3.7 bn in 2016 and € 1.3 bn in 2017.

To ensure an ambitious privatisation process, an independent fund will be established in Greece under the supervision of the relevant European institutions and encompass the privatisation of independently valued state assets. The Greek government is expected to endorse the plan for this fund by the end of October 2015 so that it can be operational by the end of the year.

The task of the fund will be to quickly identify, transfer over the lifetime of the program, and manage valuable Greek assets through privatisation and other means, including minority shareholdings.

The fund will include the shares in Greek banks after their recapitalisation, thus also enhancing banks' governance. By putting the assets on the market, a targeted value of € 50 bn shall be realised. Of this amount, € 25 bn will be used for the repayment of recapitalization of banks and other assets; 50 % of every remaining euro (i.e. € 12.5 bn) will be used for decreasing the debt-to-GDP ratio and the remaining 50 % (i.e. €12.5 bn) will be channeled towards investments.

Addressing the weak financial sector

Greece has committed to take urgently needed steps to tackle the non-performing loan (NPL) problem in the banking sector. The extraordinarily high level of NPLs and the related over-indebtedness of the private sector divert significant resources from more productive uses and prevent the banking sector from providing the necessary credit in support of a recovery of growth. In addition, a recapitalisation process of banks, to be completed before the end of 2015, will contribute to a stabilisation of the situation in the banking sector.

As outlined above, the total financial envelope of the ESM program (€ 86 bn) includes a buffer of up to € 25 bn to address bank recapitalisation and potential resolution costs. Bank recapitalisation will be accompanied by measures to strengthen the governance of the Hellenic Financial Stability Fund (HFSF) and of banks. Together with other program policies this is expected to foster a normalisation of the liquidity situation in the banking sector, allowing a concomitant gradual easing of capital controls.

The Greece’s government reassured the depositors’ protection, which was stressed by the Eurogroup in its statement of 14 August. By autumn a comprehensive assessment of the banks – so-called Asset Quality Review and Stress Tests – will be carried out by the ECB/SSM.

This will be the basis for any further decisions on the recapitalisation of banks.

Addressing social dimension in the framework’s program

In line with President Jean-Claude Juncker's Political Guidelines, the Commission, as a partner in the negotiations, has paid particular attention to ensuring social fairness of the program: to ensure that the burden of adjustment is spread across society and to protect the most vulnerable in society. The Commission conducted an assessment of the program's social impact and concluded that, if implemented fully and timely, the measures that are part of the program would return Greece to "stability and growth in a financially and socially sustainable way" and would adequately take account of the most pressing social needs and challenges in Greece.

Examples of the Commission's focus include:

·                     phasing in a guaranteed minimum income scheme and providing universal health care,

·                     ensuring that the effort required from everyone is proportionate to their income,

·                     targeting savings in areas which do not directly affect the wallets of ordinary citizens – such as reduced defence expenditure, or by addressing inefficiencies and eliminating privileges or abuses in many areas of public spending,

·                     challenging vested interests, such as phasing out favourable tax treatments, or exemptions, e.g. for some islands on VAT rates, or heavy subsidies

·                     supporting the role of the social partners and the modernisation of the collective bargaining system

·                     fighting fraud, corruption and evasion and

·                     supporting a more transparent and efficient public administration, including through moving towards a more independent tax administration, the reorganisation of ministries and the introduction of a better link between salaries and job responsibilities.

Specific initiatives to support economic growth and job creation in Greece

To complement the program and to give it the best chance of success, the Commission presented a “Jobs and Growth Plan for Greece” on 15 July 2015. Some € 35 bn will be made available to invest in people and businesses by 2020.

For instance, by increasing the rate of initial pre-financing for programs for 2014-2020 in Greece by 7 percentage points, an additional € 1 bn can be made available over those years.

The Commission is also gearing up its offer of technical assistance and expertise, through its new dedicated Structural Reform Support Service established in July. It will serve as a hub to mobilise expertise from the Commission services, the member states' administrations and other international organisations to help with the design and monitoring of reforms.

Conclusion

A successful completion of the program will require ownership of the reform agenda program by the Greek authorities and the sustained and determined implementation of agreed policies. To this end, political commitment is needed, but so is the technical capacity of the Greek administration to deliver.

The authorities have committed to make full use of the available technical assistance, which on the European side is coordinated by the new Structural Reform Support Service (SRSS) of the Commission.

Technical assistance is already in place for some key reform commitments, including on tax policy, the reform of the tax administration, the Social Welfare Review, and the modernisation of the judicial system.

However, there is capacity to extend it to other areas, like energy policy and labour market policies.

The Greek authorities will by end-September 2015 finalise a medium-term technical assistance plan with the European Commission.

Reference: Commission’s MEMO/15/5513, 20 August 2015, in:

http://europa.eu/rapid/press-release_MEMO-15-5513_en.htm?locale=en