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24/09/2016

Eurozone holds back new payments for Greece

Euro & Finance

Eurozone holds back new payments for Greece

Der Vorsitzende der Eurogruppe, Jeroen Dijsselbloem.

[Council of the European Union]

The euro zone will release the next tranche of loans for Greece as well as money for bank recapitalisation only after Athens implements agreed reforms, euro zone finance ministers said, noting a Greek pledge the conditions would be met this week.

A European Central Bank Stress test showed at the end of October that Greek banks needed a total of €14.4 billion in additional capital if they were to survive a scenario of adverse economic conditions.

Some of the needed total is likely to come from private investors, but the euro zone will have to provide the rest, using all or part of the €10 billion already earmarked for that purpose in the euro zone’s bailout fund.

“We await the finalisation of all the measures in the first set of milestones and the financial sector measures which are essential for a successful recapitalisation process,” the ministers said in a document at the end of a meeting on Greece.

The euro zone recapitalisation money is in the form of bonds of the euro zone bailout fund that can be transferred to the Hellenic Financial Stability Fund (HFSF), which would then hand them over to the banks.

“We stand ready to support the disbursement of the €2 billion sub-tranche linked to the first set of milestones and the transfer to the HFSF of the funds needed for the recapitalisation of the Greek banking sector out of the €10 billion earmarked for this purpose, provided that the agreed conditionality is met,” the ministers said.

Families at risk of losing their homes

Prime among the disagreements for the Greeks is protection for poorer families in danger of losing their homes through foreclosure.

Dijsselbloem said passing the foreclosures law was key before banks could be recapitalised, because it had a direct impact on the number of bad loans that banks would have to deal with through recapitalisation.

But Greek officials note that repossessions are politically sensitive at a time when Athens is undertaking to provide food and housing for thousands of asylum-seekers under a plan to handle the European Union’s migration crisis.

Officials in the leftist-led government say a wave of evictions could boost support for the far-right Golden Dawn party.

Differences between Athens and its euro zone partners also remain in how to treat taxpayers who are late repaying overdue tax under a special scheme.

There is also no agreement on the minimum prices of medicine and on a tax on private education, official said.

“We welcomed the commitment by the Greek authorities that this conditionality will be fulfilled in the course of the week,” the ministers said.

They said their deputies would meet at the start of next week at the latest to assess if the reforms have been implemented as agreed, paving the way for any disbursement.

France pushes for quick agreement

Greece said on Monday it would need a political decision to overcome a dispute, so that thousands of poorer Greeks would not be at risk of losing their homes as banks repossess them.

Greek Prime Minister Alexis Tsipras and European Commission President Jean-Claude Juncker discussed the bad loans issue by telephone on Sunday. French President François Hollande and German Chancellor Angela Merkel also talked about it by phone.

“Greece is making considerable efforts. They are scrupulously respecting the July agreement,” French Finance Minister Michel Sapin told reporters. “I want an agreement to be reached today. France wants an agreement today.”

Greek officials stress that Athens wants to fulfill all the points of the bailout agreement, but for the reforms to fly, they have to have social cohesion, which means not making life more difficult for poorer citizens.

“The Eurogroup will press Greece to find sufficient solutions till Wednesday,” one euro zone official said.

“There is always room for compromise but I don’t think the ministers would accept rules that are much more favorable for people not paying their mortgages than in any other country,” the official said.

Background

Athens is set to receive up to €25 billion to recapitalise its banks under an €86-billion bailout deal with international creditors.

The European Commission warned Athens of a possible haircut in Greek deposits in the event that the first bailout review was not completed this year. It said the recapitalisation of Greek banks should take place after the first review of the bailout deal, and no later than 15 November.

>> Read: Commission leaves door open for Greek bail-in

Since January, when the leftist-led government of Alexis Tsipras came to power promising to roll back austerity policies, four major Greek banks have lost 75% of their market value, or €14.5 billion.

The four are Greece's Alpha Bank, Eurobank, the National Bank of Greece and Piraeus Bank.

Greece imposed capital controls in June to slow massive withdrawals from the banks, but these have accelerated the recession that the economy has sunk back into. This in turn has sent the rates of "impaired" loans at the banks soaring.

Greece's bank rescue fund injected €25 billion into the four in 2013 in exchange for shares, and last year they raised a further €8 billion from international investors.

In July, the Greek parliament adopted the EU's Bank Recovery and Resolution Directive (BRRD) which spells how authorities can deal with failing banks. This includes "bail-ins" under which depositors can be forced to contribute to a rescue so the burden does not fall on taxpayers, as was the case in the bailouts of the 2008-2009 crisis.

>> Read: Greek banks reopen, Merkel urges swift bailout talks