PROGRAMME AND FINANCING
The third economic adjustment programme for Greece will last three years. So when exactly does it start and end?
The third economic adjustment programme 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.
What is the Memorandum of Understanding?
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, 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.
What is the financing envelope? Who provides the money?
The financing envelope for the duration of the programme amounts to up to EUR 86 bn. This is made up of a buffer of up to EUR 25 bn to address potential bank recapitalisation and resolution costs. The ESM could provide up to EUR 86 bn, i.e. it could in principle fully finance the programme. However, this does not automatically mean that the ESM will have to fully cover the financing of the programme. For instance, if the IMF decides to participate in the programme, 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 Programme (SMP) and a return of Greece to the financial markets during the programme period – as it happened last year – could reduce financing needs.
Is the money to pay back the bridge loan provided by the European Financial Stabilisation Mechanism (EFSM) included in the envelope of up to EUR 86 bn?
Yes, the funds needed to pay back the EUR 7 bn that Greece received as a bridge loan from the EFSM in July are included in the envelope of EUR 86 bn.
What amount is envisaged as the first tranche of the programme?
The Eurogroup statement of 14 August spells this out clearly: the first tranche under the ESM programme will amount to EUR 26 bn and consists of two sub-tranches. The first sub-tranche of EUR 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 EUR 16 bn will be disbursed to Greece in several instalments, starting with a first disbursement of EUR 13 bn by 20 August, followed by one or more disbursements in the autumn subject to the implementation of additional key milestones based on measures outlined in the MoU.
How will the Greek economy benefit from the first tranche? It is said that the money is primarily earmarked for banks and for clearing arrears?
The first tranche is expected to give a stimulus to the Greek economy. Earmarking EUR 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 (EUR 7 bn) and the ECB debt redemption (EUR 3 bn), parts of the remaining EUR 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.
Will euro area Member States have to pay more money to the ESM because of the new programme for Greece?
No. The ESM has an overall lending capacity of EUR 500 bn and is backed by paid-in capital of EUR 80 bn and committed callable capital of EUR 620 bn. Its remaining lending capacity is around EUR 455 bn. Therefore, lending activities linked to the programme 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. This means there is no impact on national debt ratios.
Will the IMF eventually participate in the programme?
The IMF has two roles in relation with Greece: firstly, it is a partner in the ESM programme as envisaged under the specific arrangements in the ESM Treaty. In this capacity, the IMF has confirmed – both during the work in Athens and in statements issued recently – that it has assisted in preparing the programme and it continues to support the process. The IMF will also take part in the regular review missions where programme implementation is monitored. Secondly, as regards entering into an own programme with Greece involving dedicated financing, the IMF management has underlined the intention to 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.
When will a decision on debt sustainability be taken?
The Commission, in liaison with the ECB, conducted a debt sustainability analysis which concluded that debt sustainability can be achieved through a credible reform programme and additional debt related measures without a nominal haircut. In line with the Euro Summit statement of 12 July, 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 programme and will be considered after the first positive completion of a programme review.
Who will monitor the reform progress? Will there be review missions to Athens?
The Commission, in liaison with the ECB and, wherever possible the IMF, will monitor Greece's progress in implementing the reform programme. The conditionality of the programme 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 programme.
How much money did Greece receive under the first two programmes from euro area Member States?
The Eurogroup in 2010 agreed to provide bilateral loans pooled by the Commission (so-called "Greek Loan Facility" – GLF) for a total amount of EUR 80 bn. (This amount was eventually reduced by EUR 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 Member States was part of a joint package, with the IMF committing an additional EUR 30 bn under a stand-by arrangement (SBA).
Euro area Member States eventually disbursed EUR 52.9 bn under the first programme
Following national elections, the euro area Member States in 2012, via the European Financial Stability Facility (EFSF), committed EUR 144.6 bn to Greece under the second programme (This amount includes undisbursed funds from the GLF/first programme).
The IMF committed around EUR 19.8 bn for the second programme.
The EFSF disbursed EUR 141.8 bn. This includes EUR 48.2 bn to cover the costs of bank resolution and recapitalisation. Of this amount, EUR 10.9 bn were not needed and thus later returned to the EFSF. Accordingly, the outstanding amount stands at EUR 130.9 bn.
What is 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 programme 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.
Why are the institutions pushing so heavily for a primary surplus?
A primary surplus means that state revenues 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 programmes 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 programme 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.
What are the projections for GDP growth?
The Commission services updated their forecast in August 2015. GDP is forecast to 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 programme 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.
What are the privatisation proceeds envisaged in the programme?
To preserve the on-going privatisation process and maintain investor interest in key tenders, Greece commits to proceed with the on-going privatisation programme. The implementation of this programme aims to generate annual proceeds (excluding bank shares) of EUR 1.4 bn in 2015, EUR 3.7 bn in 2016 and EUR 1.3 bn in 2017.
When will the privatisation fund be established?
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 programme, 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 EUR 50 bn shall be realised. Of this amount, EUR 25 bn will be used for the repayment of recapitalization of banks and other assets; 50 % of every remaining euro (i.e. EUR 12.5 bn) will be used for decreasing the debt-to-GDP ratio and the remaining 50 % (i.e. EUR 12.5 bn) will be channeled towards investments.
What is being done to address the weaknesses of the 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 programme (EUR 86 bn) includes a buffer of up to EUR 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 programme policies this is expected to foster a normalisation of the liquidity situation in the banking sector, allowing a concomitant gradual easing of capital controls.
Will there be a bail-in of depositors?
Depositors are protected. This 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.
SOCIAL AND GROWTH DIMENSION
What has been done to address the social dimension in the framework of the programme?
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 programme: 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 programme's social impact and concludesthat, if implemented fully and timely, the measures that are part of the programme will return Greece to "stability and growth in a financially and socially sustainable way" and will 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.
In addition to the programme, are there specific initiatives foreseen to support economic growth and job creation in Greece?
To complement the programme and to give it the best chance of success, the Commission presented a Jobs and Growth Plan for Greece on 15 July. Some EUR 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 programmes for 2014-2020 in Greece by 7 percentage points, an additional EUR 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. The SRSS, established in July, will serve as a hub to mobilise expertise from the Commission services, Member States' administrations and other international organisations to help with the design and monitoring of reforms.
Will technical assistance be provided to Greece again?
A successful completion of the programme will require ownership of the reform agenda programme 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.