Eurozone backs ESM credit line for Greece after bailout exit

Greece solidarity demo. New York, 2012. [Michael Fleshman/Flickr]

Eurozone finance ministers backed a precautionary credit line for Greece on Thursday (6 November), after the country exits its bailout at the end of the year, in a bid to balance the need to reassure investors with the demands of Greek politics.

The Greek government has staked its survival on regaining economic policy-making sovereignty after the end of the eurozone lending programme this year and on exiting an IMF bailout a year earlier than the originally envisaged 2016.

Such a move would please voters, hammered by austerity measures imposed by the EU and the IMF, ahead of possible elections next year. But it has already rattled markets, pushing up Greek bond yields.

Finance Minister Gikas Hardouvelis told Reuters on Wednesday he hoped for an interim period of up to a year after exiting the bailout, during which Greece will still get a financial safety net, but would no longer be “micro-managed” by lenders.

After two international bailouts totalling 240 billion euros since 2010, when private investors refused to lend to Athens any more, Greece wanted to switch back to market financing from the start of next year.

But markets reacted nervously to the plan, worried that Athens would no longer have any financial backup. Greek benchmark 10-year bond yields rose to 8.9 percent in late October from 5.6 percent in early September.

Greece and eurozone finance ministers discussed ways to provide Athens with fall-back financing to boost investor confidence, while addressing domestic political sensitivities.

“There is strong support for a precautionary credit line in the form of an existing ESM tool called the ECCL — Enhanced Conditions Credit Line,” the chairman of euro zone finance ministers Jeroen Dijsselbloem told a news conference.

The European Stability Mechanism (ESM) is the eurozone’s bailout fund created to rescue governments cut off from markets but only in exchange for a reform package.

“That is the path we will now further pursue and work on the conditions that will go with that,” Dijsselbloem said.

The credit line will make use of the 11 billion euros already granted to Athens by the eurozone to recapitalise Greek banks, eurozone officials said. The money turned out not to be needed after the European Central Bank’s capital adequacy assessment of main European banks last month.

The credit line could also be higher if Greek financing needs next year required that, especially if Athens ends its borrowing programme with the IMF from next year.

Greek public opinion strongly dislikes the IMF, which it blames for the austerity imposed on the country for the last four years, but several euro zone countries see the IMF as an independent guarantor of Greek reforms and want it to stay.

“There is also a broad understanding the IMF needs to continue being involved and a further discussion will have to take place on the exact form of this involvement,” Dijsselbloem told the news conference.

The recapitalisation money that could be recycled into a credit line is now in European Financial Stability Facility bonds which would be returned to the EFSF at the end of the programme in December.

Greece would instead apply for and get the ECCL from the European Stability Mechanism — the successor to the EFSF.

This would allow the Greek government to score political points at home by saying the country was no longer under a programme. But it would also make it possible for euro zone countries to set clear conditions for the availability of the money, even if it is not drawn upon.

The ECCL would also mean that Greece will have to sign a new “memorandum of understanding”, which is politically sensitive because the previous MOU detailed austerity reforms demanded by lenders and the term is resented by Greeks as a symbol of a loss of sovereignty by Athens.

Getting the credit line would take a minimum of five weeks to complete. 

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