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29/09/2016

EU releases funds for Greece

Euro & Finance

EU releases funds for Greece

Mario Draghi: "Things have changed." [European Commission]

Europe moved to reinstate funding for Greece’s stricken economy yesterday (16 July) after the parliament in Athens approved a new bailout programme in a fractious vote that left the government without a majority.

The European Central Bank increased emergency funding for Greek lenders, although capital controls will have to remain in place to avoid a run on the banks when they reopen on Monday.

European Union finance ministers also approved €7 billion in bridge loans to Greece, allowing it to make a bond payment to the ECB next Monday and clear its arrears with the International Monetary Fund.

The loans will be finalised today (17 July) provided Germany’s parliament approves a Berlin government request to open talks on a three-year bailout programme – Greece’s third in the past five years – worth up to €86 billion.

Test ballot

A majority of Germany’s conservative lawmakers voted in favour of starting talks on a third Greek bailout in a test ballot on Thursday, the eve of a vote in the Bundestag lower house of parliament, sources in the center-right parliamentary faction said.

In the test ballot, 48 lawmakers in the conservative bloc opposed talks on further Greek aid while three abstained, the sources said.

The bloc, composed of Chancellor Angela Merkel’s Christian Democrats (CDU) and their Bavarian allies, the Christian Social Union (CSU), has more than 300 seats in parliament but it was not clear how many conservative lawmakers were at the test vote.

The Bundestag is expected to give Merkel’s government a mandate to open negotiations, with the Social Democrats – her junior coalition partner – and some opposition parties expected to vote in favour.

Reward for Tsipras

The twin lifelines were a reward for Greek Prime Minister Alexis Tsipras after he won the backing of parliament in the early hours of Thursday for the tough reform measures demanded by creditors led by Germany.

>>Read: Greek parliament approves bailout

Tsipras was weakened by a revolt in his left-wing Syriza party, who voted against the measures, forcing him to rely on opposition votes to pass the package. He is expected to reshuffle his cabinet to replace four ministers and deputy ministers who rebelled.

The 40 year-old prime minister told aides the rebels had created an “open trauma” in the party but that he was committed to sticking to the deal, a government official said.

Interior Minister Nikos Voutsis said a snap election could be held in September or October, “depending on developments”.

German Finance Minister Wolfgang Schäuble, one of Greece’s toughest critics, questioned whether Athens would get a third bailout, even after the parliamentary vote. He suggested its financing needs were spiralling and a debt “haircut” or write-off – outside the eurozone – might be a better solution.

“We will now see in the negotiations whether there is even a way to get a new programme, taking into account financing needs, which have risen incredibly,” Schäuble told Deutschlandfunk radio.

After meeting with SPD politicians in Berlin, Eurogroup President Jeroen Dijsselbloem said he would like discussions about a possible Greek exit from the eurozone to stop, and he hoped that German lawmakers would support opening talks on further Greek aid in the parliamentary vote on Friday.

The move by the Greek parliament was enough to persuade the ECB to raise Emergency Liquidity Assistance (ELA) for the banks by €900 million over a week.

“Things have changed now,” ECB President Mario Draghi told a news conference in Frankfurt. “We had a series of news with the approval of the bridge financing package, with the votes, various votes in various parliaments, which have now restored the conditions for a raise in ELA.”

Draghi said it was difficult to make decisions on Greece given the constraints of an ELA programme, which was never meant to provide unlimited and unconditional support for a banking system facing a major overhaul.

Deputy Finance Minister Dimitris Mardas said the ECB support would allow banks to reopen, three weeks after they were closed, when Athens imposed capital controls to prevent a flood of withdrawals collapsing the banking system. “All the banks everywhere will be open,” he told state television.

Cash withdrawals, currently limited to €60 a day, are likely to remain restricted.

‘Timeout better’

Finnish and Lithuanian lawmakers on Thursday gave their approval to begin negotiations.

Schäuble said he would vote to open talks, but underlined risks surrounding negotiations that will be conducted over the next few weeks.

After a warning from the IMF this week that Greece’s massive public debt could not be managed without a significant writedown, Schäuble said a debt haircut was incompatible with euro membership and would mean Greece would have to leave the euro, at least temporarily. “But this would perhaps be the better way for Greece,” he said.

European finance ministers said after a conference call on Thursday morning they agreed “in principle” to start talks with Greece on the new bailout and called on Athens to adopt a second set of reforms by 22 July.

Non-eurozone countries protected

All 28 EU countries are expected to contribute to the bridge loan, despite reluctance of non-euro members such as Britain and the Czech Republic, after a compromise was found to use eurozone funds to guarantee their ring-fenced contributions.

Britain accepted the deal after receiving what its finance minister, George Osborne, said was a legally binding deal to protect any British money used in the loan.

IMF not withdrawing

The IMF noted the issue of debt relief in a report released this week, saying the only alternatives to “deep upfront haircuts” would be for European creditors to grant Athens a 30-year debt service holiday on present and future loans or make large annual fiscal transfers to the Greek budget.

Those options are unpalatable to German and other eurozone creditor governments that do not want to tell their taxpayers that money lent to Greece is not coming back.

Klaus Regling, head of the eurozone’s bailout fund, said he expects it to contribute €50 billion euros to the third bailout.

The rest would come from €16 billion in remaining undisbursed IMF funds, once Athens has cleared the arrears, as well as privatisation receipts and possible limited borrowing on financial markets near the end of the three-year programme.

Schäuble said in a letter to the president of Germany’s Bundestag that the IMF would not be involved in payment of a first tranche of a third Greek bailout.

That tranche is due in mid-August 2015, according to the letter, seen by Reuters, in which Schäuble asked parliament to agree to open talks on a third bailout.

The letter said that the IMF would make its further involvement dependent on successful conclusion of the first programme review in autumn 2015, and confirmation of Greece’s debt sustainability.

But Merkel’s chief of staff, Peter Altmaier, said on a German television talkshow late on Thursday that IMF Managing Director Christine Lagarde had “made very clear that the IMF will not withdraw” from bailing out Greece.

He said the German government had “quite clearly said that the IMF must remain on board, that the IMF must be involved”.

Positions

European Parliament President Martin Schulz said yesterday (16 July) that it was necessary to put the Greek economy back on the path it was on at the end of last year, when it had a primary budget surplus and economic growth.

"Of course Greece was on a very, very good path at the end of 2014 ... we need to put the country back on the path it was on at the end of last year," Schulz said in Berlin.

Background

Eurozone leaders reached an agreement on a programme to save Greece from bankruptcy after 17-hour talks on 13 July.

>>Read: Eurozone reaches ‘laborious’ tentative deal on Greece

If approved, this will be the third rescue programme for Greece in five years. It will be managed by the European Stability Mechanism (ESM), the eurozone permanent crisis resolution fund that was initially set up five years ago in an effort to save Athens from bankruptcy.

Here is a look at what Greece must do:

  • Request continued support from the International Monetary Fund after its current IMF program expires in early 2016.
  • Streamline consumer tax and broaden the tax base to increase revenue. Laws on this are due by Wednesday.
  • Multiple reforms to the pension system to make it financially viable. Initial reforms are due by Wednesday, others by October.
  • Safeguard the independence of the country's statistics agency.
  • Introduce laws by Wednesday that would ensure "quasi-automatic spending cuts" if the government misses its budget surplus targets.
  • Overhaul the civil justice system by July 22 to make it more efficient and reduce costs.
  • Carry out product market reforms that include allowing stores to open on Sundays, broadening sales periods, opening up pharmacy ownership, reforming the bakeries and milk market and opening up closed and protected professions, including ferry transport.
  • Privatize the electricity transmission network operator unless alternative measures with the same effect can be found.
  • Overhaul the labour market. This includes reviewing collective bargaining, industrial action and collective dismissal regulations.
  • Tackle banks' non-performing loans and strengthen bank governance.
  • Significantly increase the privatization program, transferring 50 billion euros worth of Greek assets to an independent fund, based in Greece, to carry out the privatizations.
  • Modernize, strengthen and reduce the costs of Greek administration, with a first proposal to be provided by 20 July.
  • Allow members of the three institutions overseeing Greece’s reforms - the European Central Bank, IMF and European Commission, previously known as the 'troika" - to return to Athens. The government must consult with the institutions on all relevant draft legislation before submitting it to public consultation or to parliament.
  • Reexamine, with a view to amend, legislation passed in the last six months that is deemed to have backtracked on previous bailout commitments.