By Arthur Beesley in London
Europe is transfixed these days by Brexit, terrorism, migrants and the populist advance. But the riddle of Greece remains.
A damning new report by the IMF’s in-house inspectorate finds fault on several grounds with the fund’s approach to the country. This is backwards-looking exercise, which takes stock of bailouts for Greece, Ireland and Portugal. Yet there are clear implications for the next phase of the long battle to restore fiscal stability in Athens.
Matteo Renzi is politically cornered. Troubled banks – or more precisely Monte dei Paschi di Siena - have left the Italian premier facing a problem with no good answers.
As everyone who has played the famous video game knows, Super Mario is not always super. Temporarily able to boost his size and powers, he is nevertheless, for much of the time, just regular Mario.
What to make then of ECB president Mario Draghi? The eurozone crisis has seen the ECB repeatedly expand its operations in its bid to stimulate the euro area economy. As Mr Draghi has repeatedly said, these “extraordinary measures” were meant to provide a temporary breathing space for governments. Instead, politicians have proved all too willing to let the ECB permanently shoulder the load.
In a hearing before the European Parliament yesterday, Mr Draghi cut a frustrated figure as he set out the steps nations need to take to finish building their “incomplete” and “still fragile” monetary union, and to make their economies more competitive. Read more
Nearly six months after knuckling down to work on the next stage of overhauling EU bank rules, finance ministers will meet in Luxembourg on Friday to acknowledge that they aren’t where they want to be.
Rather than being able to hail progress in the next steps of the euro area’s ambitious “Banking Union” reform programme, instead they have to tackle fundamental splits over how to take the project forward. If they can.
The divisions are laid bare in a package of documents prepared by the Netherlands, which holds the rotating presidency of the EU, and which is trying to chart a course for future negotiations before handing the reins over to Slovakia at the end of the month.
To pick through the splits, the FT Brussels blog has posted an annotated copy of the main Dutch document here (just click on the parts highlighted yellow:)
At the centre of the ruckus is the Commission’s proposal for the euro area to create a centralised system to guarantee bank depositors, known as the EDIS.
History is full of great projects left half finished – the Sagrada Família cathedral in Barcelona, the Beach Boys’ Smile album, the last Tintin book … could the euro area’s banking union join them?
Forged at the height of the debt crisis as a way to restore trust in the financial sector, the banking union remains very much a work in progress, and it’s increasingly unclear whether its architects are all working off the same plans.
While the European Central Bank is firmly installed as the currency bloc’s banking supervisor (something examined in-depth in this new study by Bruegel,) and new rules on handling financial crises are on the statute books, discussions are becoming bogged down over the banking union’s third pillar – a centralized scheme for guaranteeing bank deposits. That plan, known as EDIS, is loathed in Berlin while strongly supported by the ECB and governments in southern Europe.
The row between national capitals over EDIS is only part of a larger, and extremely complex negotiation – one that is hampering efforts by Jeroen Dijsselbloem, the Dutch finance minister, to sign off his country’s EU’s presidency by getting a deal on a banking union workplan. The split is likely to be a topic of discussion among policymakers at today’s Brussels Economic Forum. Read more
By Mehreen Khan in London
The International Monetary Fund’s latest recommendations on Greek debt relief have leaked.
Yesterday, ahead of the latest meeting of eurozone finance ministers on May 24, the IMF repeated it would take part in Greece’s €86bn bailout only if its European partners could prove “the numbers add up”.
A key part of this calculation is for the fund to be fully assured that Greece’s debt mountain is finally placed on a sustainable downward trajectory. Read more
Monday was supposed to be the day when eurozone finance ministers flew to Brussels for an emergency eurogroup meeting (just their first of 2016!) to agree a way forward on Greece’s star-crossed €86n third bailout. But despite weeks of intensive talks, negotiators are no closer to a deal then they were when they were sent back to Athens two months ago.
Last night, Christine Lagarde, the International Monetary Fund chief, sent a letter to all 19 finance ministers ahead of the Monday meeting with her demands: drop all the talk about new austerity measures and quickly agree a plan for debt relief so that a deal can be met before a possible Greek default in July. We got a hold of the letter, and have posted a news story on its contents here. But as is our practice at the Brussels Blog, we thought we’d offer up an annotated version of the full text, sent to national capitals last night:
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EU economic chief Pierre Moscovici, right, with Portugal's new finance minister in Lisbon
There’s been a rare spate of good economic news for the eurozone recently, with Eurostat announcing last week that the currency union’s gross domestic product had finally returned to pre-crisis levels and was growing at a 0.6 per cent quarterly clip – enough to outpace the US or the UK so far this year. But growth remains uneven across the 19-member bloc, and the first quarter’s performance remains meagre by historical standards. As a result, it will likely not be enough to help eurozone countries currently finding it difficult to get their debt and deficit levels back under EU budget ceilings.
Those countries sparring with Brussels over such budget targets – France, Italy, Spain and Portugal – will be in the spotlight today when the European Commission issues its new economic forecasts, which will include predictions on whether any of them are making progress towards getting their deficits below the 3 per cent of GDP threshold or – in the case of Italy, which is already below the deficit ceiling – are cutting their debt piles fast enough.
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Spain's Mariano Rajoy, right, with Jean-Claude Juncker, European Commission president
Next to Ireland, there have been few eurozone countries that have been touted as austerity success stories more often than Spain. Under the government of Mariano Rajoy, the centre-right prime minister who is still clinging onto office after indecisive elections in December, the country went through a series of wrenching reform programmes and came out the other side with relatively robust growth. In February, the European Commission said Spain’s economic output had grown 3.2 per cent last year, double the eurozone average.
But one thing Madrid can’t seem to do is get a handle on is its budget deficit. Originally, the Spanish government was supposed to get its deficit back below the EU’s ceiling of 3 per cent of gross domestic product by 2013. When it became clear at the height of the eurozone crisis that was impossible, the deadline got extended by a year. But a year later, Madrid had made so little progress that it got a further two-year extension, to 2016. It appears things have gotten no better over those two years, however: yesterday, Spain’s national statistics office announced that the country’s 2015 deficit was nearly 5.2 per cent – even higher than Brussels estimated back in February. Read more
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Cypriot finance minister Harris Georgiades, left, with eurogroup president Jeroen Dijsselbloem
And then there was one. If all goes according to plan, eurozone finance ministers will bid a fond farewell to the Cypriot bailout on Monday, making the island nation the fourth of the five countries that were forced into a rescue programme at the height of the crisis to exit. Only Greece remains.
In many respects, the Cypriots have been model bailout students. Nicosia only spent about €7.5bn of the €10bn originally allocated in the programme, and its economy returned to growth last year, a full year earlier than the bailout’s architects anticipated. Indeed, it has out-performed on almost every major economic indicator: its debt levels are lower than originally forecast, its projected budget deficit isn’t a deficit, and its current account is almost in balance.
Still, not everything is so rosy. Most importantly, the bailout will end without the Cypriot government completing all the reform tasks it was supposed to – the privatisation of the state telecommunications operator proved too politically radioactive so close to parliamentary elections, so won’t be done in time. As a result, Monday’s eurogroup meeting will be a farewell, but not a formal closure of the programme. That will happen at the end of the month when the three-year rescue just expires. Read more
Regling, right, with European Central Bank president Mario Draghi at a press conference
Klaus Regling has been the head of the eurozone’s rescue funds – first the temporary European Financial Stability Facility, now the permanent European Stability Mechanism – since the outset of the debt crisis, a perch that has given him a unique insight into the five years of occasionally contentious deliberations over the bloc’s five bailouts: Greece, Ireland, Portugal, Spain and Cyprus.
But as the EFSF turned into the ESM, and as the €500bn ESM gained staff and authority, Regling’s own role in eurozone debates has grown – particularly on the issue of Greek debt, where he has been a frequent and outspoken critic of the argument, made both in Athens and by the International Monetary Fund, that the heavy debt burden is what ails the Greek economy.
Two years ago, in an interview with our friends and rivals at the Wall Street Journal, Regling in essence sounded the death knell for a November 2012 deal where eurozone governments had promised debt relief for Athens as long as it achieved a primary budget surplus – something it achieved by the end of 2013. As Regling predicted, the eurozone did not restructure Greece’s debts despite Athens living up to its side of the 2012 agreement and posting a surplus.
In an interview this week with the Financial Times, Regling has done something similar. As part of July’s controversial €86bn bailout deal, creditors again held out the promise of debt relief. And Regling is now suggesting that even if it does occur, a restructuring will not be on the scale Athens and the IMF had been arguing for just four months ago.
Our story on the Regling interview is here, but as is our practice at the Brussels Blog, we’re offering an annotated (and slightly edited for length) transcript for readers who want to hear more from Regling below. Read more
Juncker urged additional eurozone reform in his "state of the union" address in Strasbourg
When Jean-Claude Juncker this week told a packed European Parliament he intends to forge a eurozone system for guaranteeing bank deposits, the European Commission president’s intention was to send a firm message of determination to strengthen the single currency’s foundations.
But just days after Juncker’s “state of the union” address, his attempt to sow hopeful seeds has hit stony ground in Berlin, where the plan was taken more as a declaration of war.
Germany’s fightback begins when finance ministers gather in Luxembourg on Friday, and is set out in a “non paper” obtained by the FT. Our story on the document in the FT’s dead-tree edition is here, but for those who want a bit more detail, we’ve posted it here, too.
Unlike the series of emergency gatherings on Greece this summer, the weekend “informal” meeting of eurozone finance ministers was intended to be a calmer, and above all shorter, stocktaking of the health of the common currency.
Now, however, Germany has decided to use it as an opportunity to put down clear red lines in an attempt to redirect the eurozone reform discussion, which gained momentum following the mess of the July Greek bailout deal on what Berlin believes is an unacceptable course. Read more
ESM chief Klaus Regling, right, with German finance minister Wolfgang Schäuble
Now that eurozone finance ministers have approved reopening bailout talks with Greece, the long slog to negotiating a €86bn deal begins. And one of the remaining unanswered questions is just how Greece’s bailout creditors plan to pay for it.
Klaus Regling, who heads the eurozone’s €500bn rescue fund, told German television this week that his European Stability Mechanism was preparing a loan of “perhaps €50bn” for Greece’s third bailout. That would leave as much as €36bn to scrape together from other sources.
The second largest source of bailout funding throughout the Greek crisis has always been the International Monetary Fund, which is still in the middle of a five-year €28bn rescue. That IMF programme has distributed €11.6bn so far, leaving €16.4bn that the new bailout could tap.
But the recent update of the IMF’s debt sustainability analysis, published by the Fund on Tuesday, makes clear that they are in no mood to disburse any of those funds unless there is a full-scale debt restructuring – which Germany and other eurozone creditor countries have fiercely resisted. Read more
Euclid Tsakalotos, the new Greek finance minister, at Tuesday's eurogroup meeting
Late on Thursday, the Greek government submitted its long-awaited economic reform proposal to go along with Wednesday’s request for a new three-year bailout programme.
The package sent to creditors included three documents: first is a letter from Alexis Tsipras, the Greek prime minister, which we’ve posted here; second it a more detailed letter from Euclid Tsakalotos (here), the new finance minister; and the third is what’s called the “prior actions” – a 13-page plan of reform measures that must be completed prior to winning bailout aid (here).
We will more completely gut these documents in the morning, but a few things that stand out. First, none of the documents mentions debt relief. This was a major demand of Yanis Varoufakis, Tsakalotos’ predecessor. And while it is obliquely mentioned in Wednesday’s bailout request, there’s nothing in the documents sent to Brussels Thursday night that mentions the topic.
Instead, what is interesting about both the Tsipras and Tsakalotos letters is their explicit mention of wanting to remain in the EU’s common currency. As Tsipras puts it:
With this proposal, the Greek people and the Greek government confirm their commitment to fulfilling reforms that will ensure Greece remains a member of the Eurozone and ending the economic crisis. The Greek government is committed to fully implementing this reform agenda – starting with immediate actions – as well as to engaging [sic] constructively on the basis of this agenda, in the negotiations for the ESM loan.
Greece's Alexis Tsipras, left, with Germany's Angela Merkel on Tuesday night in Brussels
Greek authorities got their final dash to find a bailout agreement before the weekend formally underway on Wednesday by submitting a simple one-page request to the eurozone’s €500bn bailout fund, the European Stability Mechanism, for a new three-year programme.
Under the timetable agreed with EU leaders at Tuesday night’s summit, the request letter is something of a formality. The real details are due on Thursday, when Athens will submit their “prior actions” proposal – the detailed economic reforms that they will pursue under a new, third programme.
Still, the letter (which we’ve posted here) includes some interesting clues as to where Athens is headed. First of all, Greece is seeking a three-year programme and not a two-year bailout that was requested last week. The International Monetary Fund has estimated a three-year programme could cost as much as €70bn.
The letter also suggests Athens is willing to “immediately implement…as early as the beginning of next week” some of the things that creditors were demanding during negotiations on its old €172bn rescue, which expired June 30 – including tax reforms and pension system overhaul.
This appears part of an effort to quickly release short-term “bridge financing” so that Athens can repay the €1.5bn it still owes to the IMF, avoid a default on a €3.5bn bond due the European Central Bank in less than two weeks, and pay another €3.2bn ECB-held bond in August. Read more
Greece’s recently-departed finance minister Yanis Varoufakis repeatedly argued that Greece could never leave the eurozone because there is nothing in the EU treaties that permits exit from the bloc’s common currency. But that hasn’t stopped EU lawyers from looking.
According to eurozone officials, EU legal scholars have been combing through the treaties to find provisions that would allow for Grexit – not because it is something they’re pushing for, but rather because they’re worried the country could be soon entering a legal limbo that could prevent it from getting the financial aid it desperately needs.
If Greece begins printing its own money – which could happen in a matter of weeks if the European Central Bank decides to cut off emergency loans to Greek financial institutions – it may no longer be eligible for aid from the eurozone’s €500bn rescue fund, since it is using a different currency.
But because Greece would still be legally part of the eurozone, it wouldn’t be eligible for the aid scheme reserved for non-EU countries, known as a “balance of payments assistance” programme. Hungary, Romania and pre-euro Latvia all received so-called “BPA” programmes during the crisis.
The traditional assumption is that because there is no explicit way to leave the eurozone, the only clause that comes into play is Article 50 of the Treaty on European Union, which allows for withdrawal from the entire EU. This would require Greece to request a departure, however, which is unlikely, and while there are an increasing number of leaders willing to let Greece leave the eurozone, none want it to leave the EU.
Officials say lawyers are instead looking at Article 7, which was adopted for a very different reason: In the wake of the Austrian government’s decision to include the far-right Freedom Party of nationalist Jörg Haider in a coalition, EU leaders wanted a way to punish countries that did not live up to European values. Read more
Alexis Tsipras, the Greek prime minister, has once again changed the terms of the debate in the ongoing crisis by requesting a new third bailout from the eurozone’s €500bn bailout fund, known as the European Stability Mechanism, just hours before his current bailout expires.
According to a copy of the letter sent to the ESM and Jeroen Dijsselbloem, the Dutch finance minister who chairs the committee of his eurozone counterparts, which we’ve posted here, the loan request is for €29.1bn to cover debts maturing into 2017.
That would seem to be a pretty traditional bailout request. But it also contains some untraditional demands that may be difficult for creditors to accept. Below is an annotated version of Tsipras’ letter:
Dear Chairperson, dear President,
On behalf of the Hellenic Republic (“the Republic” or “Greece”), I hereby present a request for stability support within the meaning of Articles 12 and 16 of the ESM Treaty.
The ESM treaty is the law that now governors all eurozone bailouts. It wasn’t in place for either Greece’s first or second bailouts, but it would set the terms for its third. Articles 12 and 16 simply state the purpose of a bailout programme: to “to safeguard the financial stability of the euro area as a whole and of its Member States.” Unfortunately for Tsipras, Article 16 also happens to mention that a new programme must include a new “MoU” – or memorandum of understanding, a phrase that is politically poisonous in Greece.
Demonstrators hold up placards urging a "no" vote in Sunday's bailout referendum
[UPDATE] Late on Monday, Donald Tusk, the European Council president, wrote to Alexis Tsirpas, the Greek prime minister, to inform him that his request for reconsidering an extension of his country’s bailout had been denied. We’ve obtained a copy of that letter, too, and posted it here.
In it, he notes the eurogroup of finance ministers already decided the issue, adding:
After consultations with leaders, in the absence of new elements, I see no willingness to go against the position expressed by finance ministers at their 27 June meeting.
This is likely the last chance Tsipras had to avoid having Greece’s EU bailout expire on Tuesday night. With that gone, on Wednesday his country goes without an EU safety net for the first time in five years.
There may be less than 48 hours remaining in Greece’s EU bailout, and Saturday’s decision by eurozone finance ministers not to extend the programme through next Sunday’s Greek referendum on creditors’ “final” offer was largely seen as the final nail in the rescue’s coffin.
But could it still be extended at the 11th hour?
That’s clearly the hope of Alexis Tsipras, the Greek prime minister, who has written to all eurozone heads of government asking them to reconsider the decision. We’ve obtained a copy of the letter sent to Xavier Bettel, the prime minister of Luxembourg, who takes over the EU’s rotating presidency this week. A copy of the letter is posted here. Read more
Finance minister Yanis Varoufakis, left, with Greece's negotiating team at the eurogroup
Athens’ final counterproposal to its trio of bailout monitors would re-impose many of the large-scale corporate taxes and pension contributions that creditors demanded be stripped out amid concern it would plunge Greece into a deeper recession.
According to a copy, distributed to eurozone finance ministers Thursday and obtained by the Financial Times, Athens has stuck with its demand for a one-time 12 per cent tax on all corporate profits above €500,000, a measure the government estimates will raise nearly €1.4bn by the end of next year.
In addition, it would raise employer contributions to Greece’s main pension fund by 3.9 per cent and would more slowly implement measures to raise the country’s retirement age to 67 and “replace” rather than phase out a special “solidarity grant” to poorer pensioners.
We have posted a copy of the Greek counterproposal here.
Greece’s bailout creditors – the International Monetary Fund, European Central Bank and European Commission – eliminated the one-time profits tax and the increase in employer contributions to the pension system in their offer to Athens yesterday, arguing that such heavy levies on companies would severely hit economic growth. It also pushed for more aggressive timeline for raising the retirement age and cutting the special top-up for poorer pensioners.
Still, the Greek plans contain some key concessions from the original proposal submitted by Alexis Tsipras, the Greek prime minister, to creditors in an offer made on Monday. Although legislation raising the retirement age would not be implemented until the end of October – creditors want it to kick in immediately – it accepts the 67-year retirement age should be hit by 2022. Originally, Athens was proposing 2025. Read more
IMF's Christine Lagarde, right, and EU economics chief Pierre Moscovici in Brussels Wednesday
As expected, the standoff between Athens and its creditors that exploded into the open on Wednesday has focused on pension reforms – a point made clear in a document obtained by the FT’s correspondent in Athens, Kerin Hope.
According to the five-page list of “prior actions” – which are always the real nitty-gritty in any bailout agreement, since it lists the specifics that the sitting government must implement and the calendar for implementation – creditors have asked for wholesale changes to the pension proposals made earlier this week by Alexis Tsipras, the Greek prime minister.
We’ve posted the document here.
In order to achieve savings of 1 per cent of gross domestic product – or about €1.8bn – starting next year, creditors are demanding a significant rewriting of Tsipras’ pension reform plan.
First, rather than gradually raising the effective retirement age to 67 by 2025 as Athens has proposed, creditors want that moved up to 2022 (Athens had originally shot for 2036 in one of its earlier proposals). The creditor plan would allow for retirement at 62, but only for those who have paid into the system for 40 years. Those measures would become law immediately, under the counterproposal. Read more