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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Alexis Tsipras, the Greek prime minister, in between meetings at his office last week
When Wikileaks published a transcript last week of a private teleconference between top International Monetary Fund officials discussing Greece’s bailout, the thing that got Athens the most worked up was a prediction made on the call by the IMF’s European chief Poul Thomsen: he forecast there would be no decision on the programme’s way forward until Greece ran out of money in July. Yesterday, bailout negotiators left Athens after yet another fruitless week of talks. And while they vowed to resume negotiations during the IMF’s spring meetings in Washington, which start on Friday, the differences between the main players remain so wide that Mr Thomsen’s prediction may not be too far off the mark.
For those who only follow the Greek crisis episodically, the fact that the eurozone is facing yet another make-or-break bailout deadline may seem baffling. Wasn’t the Grexit car wreck avoided last July after a series of all-night summits ended with a €86bn rescue deal? Yes and no. The July deal gave Greece €13bn of the €86bn almost immediately, after Athens agreed to quickly pass an overhaul of its value-added tax system and make cuts to pension benefits. But much of the heavy lifting was put off until the new bailout’s first quarterly review – including, critically, a decision by the IMF on whether to participate in the bailout at all.
Casual followers may read the words “first quarterly review” and assume that such a review would be completed at the end of the first quarter. Which, in the case of the new Greek programme, would have meant October. But it has become an unfortunate custom that “quarterly” reviews of Greek bailouts can actually stretch over several quarters – the fifth quarterly review of the second Greek bailout went on for nearly a year. The current “quarterly” review has now gone on for about six months after the first quarter ended. Read more
What would a third bailout for Greece look like? The International Monetary Fund has provided the first public insight into how much it could cost, and it will be expensive. According to IMF estimates, over the next three years, Greece will need €52bn in new bailout financing.
That is close to an estimate we came up with in February. But that may not even be enough. The new IMF debt sustainability analysis, which we’ve posted here, assumes the money in the EU bailout that just disappeared would be used to cover Greek needs through October. That cash, about €16.3bn, is now gone. So the total price tag could go up to close to €70bn.
But that’s not all. The IMF report also assumes the budget targets and economic growth projections made during the recent negotiations still hold. Under that plan, Greece would post a primary budget surplus – revenues minus expenses, when interest on debt isn’t counted – of 1 per cent of gross domestic product this year, rising gradually to 3.5 per cent in 2018.
It also assumed no economic growth this year, but a return to 2 per cent growth next year and 3 per cent in 2017 and 2018.
Given Greek banks have been closed for a week and its economy is in free-fall, those targets are, in all likelihood, becoming more outdated by the minute. Read more
Moghadam, left, with his deputy director Poul Thomsen during a meeting in Brussels
As the eurozone crisis slowly fades into history, many of its most prominent players are moving on as well. On Wednesday, Reza Moghadam, head of the European department at the International Monetary Fund and arguably the fund’s most influential official during the crisis, announced his departure to take a top job at Morgan Stanley in London.
According to officials close to Moghadam, part of his reason for leaving is because he held several of the IMF’s most senior posts over his 22 year career and now could only move laterally to other director positions. In addition, those who have spoken to him said most of his family – including his mother and adult children – now live in the UK and he was eager to return to Britain after more than two decades in Washington.
“Leaving the fund has not been an easy decision and I go with a heavy heart,” Moghadam said in a statement released by the IMF. “But I look forward to a new chapter in my life and a new career, and to being back home in the UK with my family.”
At Morgan Stanley, Moghadam will be vice chairman of the global capital markets group, where he will continue to deal with public finance issues, including working with governments seeking advice on debt or fiscal issues. Because he’s moving into a private-sector job that overlaps with his current duties, he will give up his IMF responsibilities immediately and won’t begin his job in London until October or November. Read more
José Manuel Barroso announces the Ukrainian aid programme on Wednesday
The EU’s announcement on Wednesday of a new €11bn aid package for Ukraine is both more and less than it first appears.
The “more” part of the package comes in the €1.6bn of so-called “macro-financial” assistance, which is the traditional kind of direct budget aid that we’ve come to recognise in eurozone bailouts. Up until the fall of Victor Yanukovich’s Russia-backed regime in Kiev, the EU had only signed up to €610m in such loans, so the extra €1bn is a significant increase.
The “less” part of the package is the estimated €8bn to come from Europe’s two development banks, the European Investment Bank and the European Bank for Reconstruction and Development. That aid is contingent on finding infrastructure projects to fund in Ukraine, which may prove a fraught exercise. In any case, it’s likely to be long-term assistance of only marginal use to the struggling technical government in Kiev right now. Read more
A slide from a January 2014 investor presentation by the Ukrainian finance ministry
First of all, just how much financial trouble is Ukraine in?
Almost all major economic powers were out on Monday saying that any aid package would have to wait for a full International Monetary Fund programme. But such “stand-by arrangements” can take months to negotiate – and IMF officials have made clear they want a new government firmly in place before those negotiations can begin, so that may mean we’re waiting until after May’s presidential elections.
So will Ukraine make it until then? Analysts are dubious, and the Ukrainian finance ministry’s declaration on Monday that they are seeking bilateral loans from the US and Poland in the next week or two certainly implies that they’re not sure they can make it that long either.
One key metric to watch is Ukraine’s foreign currency reserves, which for those not seeped in international finance is about as close to a national bank account for emerging market economies as you can get. If Ukraine runs out of reserves of dollars, it can’t pay any of its bills to foreign creditors – such as bondholders or gas providers – and essentially goes broke. Read more
Jean-Claude Trichet, right, with the parliament's economic committee chair, Sharon Bowles
The troika of bailout lenders has not been getting much love at the European Parliament’s ongoing inquiry into its activities in recent weeks. But the criticism is not just coming from MEPs in the throes of election fever. Predictions of the troika’s demise have come from some unexpected quarters, including current and former members of the European Central Bank executive board.
During the hearings, MEPs have particularly criticised the troika — made up of the International Monetary Fund, European Commission and the ECB — for its overly optimistic growth forecasts for bailout countries, which have been repeatedly revised downwards. Perhaps unsurprisingly, they have also suggested that the troika be subject to greater parliamentary oversight.
Hannes Swoboda, the Austrian social democrat who heads the centre-left caucus in the parliament, went further, saying the body is undemocratic, hostile to social rights and that the EU would be better off without it. Read more
In a June letter, Anastasiades called Bank of Cyprus his country's "mega-systemic bank".
After the upheaval of March’s prolonged fight over Cyprus’s €10bn bailout, much of the ensuing debate has focused on the island’s largest remaining financial institution, the Bank of Cyprus, which was saved from shuttering but faces an uncertain future.
The bank’s fate was highlighted in a letter from Cyprus’s president to EU leaders in June, where he argued that eurogroup finance ministers had not properly dealt with the “urgent need” to address the “severe liquidity strain” the bailout had placed on the country’s last “mega-systemic bank”.
“I stress the systemic importance of BoC, not only in terms of the banking system but also for the entire economy,” Nicos Anastasiades wrote at the time.
Well, the European Commission’s soon-to-be-released first review of the Cyprus programme, a draft of which was obtained by Brussels Blog and posted here, shows that the fate of the bank is still somewhat unresolved – and that the EU has decided to make Nicosia’s promise to live up to the original bailout terms a primary condition for easing onerous capital controls which still hamper economic activity. Read more
Greek finance minister Stournaras, left, with IMF chief Lagarde at Monday's eurogroup meeting
In an interview with five European newspapers published Thursday, Jeroen Dijsselbloem, the Dutch finance minister who heads the committee of eurozone finance ministers, said his eurogroup will need to look at whether Greece needs additional bailout aid in April 2014.
This will surprise some members of the troika, particularly the International Monetary Fund, who were pushing for a reckoning much more quickly amid signs the €172bn second Greek bailout is running out of cash much sooner than anticipated.
Once the €3bn in EU aid contained in a new €4.8bn tranche approved this week is paid out, total EU outlays will reach €133.6bn — out of a total €144.6bn committed (the IMF puts up the rest). So just €11bn left in the EU’s coffers. Further evidence that cash is leaving too quickly is contained in the latest report on Greece’s rescue prepared by the European Commission, which our friends and rivals at Reuters obtained and helpfully posted for everyone to see.
As Brussels Blog noted earlier, there is no more EU cash left in the programme for the second half of next year, even though the bailout was originally supposed to contain enough until the end of 2014. But this chart in the new report makes clear that cash may run out even quicker than that: Not only is the third and fourth quarters of 2014 completely unfunded, now there’s only €1.5bn left for the second quarter, too. Read more
Greek prime minister Antonis Samaras, centre, holds a cabinet meeting this week.
Just how off track is Greece’s €172bn second bailout? When the FT reported that a new €3bn-€4bn financing gap had opened up in the programme, EU and International Monetary Fund officials went out of their way to insist there wasn’t a gap at all.
“There is no financial gap. The programme is fully financed for at least another year, so there is no problem, on the premise that we reach a final agreement on the review in July,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup.
IMF spokesman Gerry Rice weighed in with a written statement: “If the review is concluded by the end of July 2013, as expected, no financing problems will arise because the program is financed till end-July 2014.”
Notice the caveats, however. Both Dijsselbleom and Rice say there won’t be a shortfall – as long as the IMF is able to distribute its next €1.8bn aid tranche before the end of July. Why? Because of the new financing gap, which means the Greek programme essentially runs out of money in July 2014. The IMF must have certainty that Greece is fully financed for 12 months or it can’t release its cash, so after July, it must suspend its payments. Read more
Greek prime minister Samaras takes questions after last month's EU summit in Brussels.
When eurozone leaders finally reached agreement on an overhauled €173bn bailout of Greece last month, Antonis Samaras, the Greek prime minister, declared the prospect of his country leaving the euro to be over: “Solidarity in our union is alive; Grexit is dead.”
But late on Friday, someone decided to resurrect it: the International Monetary Fund. In its first report on the Greek bailout since last month’s deal, the IMF was unexpectedly explicit on the risks that Greece still faces, including the potential for full-scale default and euro exit.
In fact, the 260-page report includes a three-page box explicitly dedicated to examining the fallout if Greece were to be forced out of the euro, which we’ve posted here. The box, titled “Greece as a Source of Contagion”, concludes that while the eurozone has improved its defences, it still remains hugely vulnerable to shocks that would come following Grexit. Read more
IMF chief Christine Lagarde arrives at Monday's eurogroup meeting where Greek deal was struck.
When eurozone finance minsters announced their long-delayed deal to overhaul Greece’s second bailout early Tuesday morning, there was much they didn’t disclose.
The most glaring was how big a highly-touted bond buyback programme would be, a question dodged repeatedly at a post-deal news conference. But there were other things that were left out of a two-page statement summing up the deal, including how much the European Central Bank was making on its Greek bond holdings, profits that will be returned to Athens as part of the agreement.
It turns out, those were not the only – or even the biggest – unanswered questions left after the early-morning deal. As we report in today’s dead-tree edition of the FT, ministers failed to find enough debt relief measures to get to the purported Greek debt target of 124 per cent of economic output by 2020, far above the 120 per cent target set in February.
In reporting our story, we relied heavily on a leaked chart that we got our hands on (which we’ve linked to here) that lays out in great detail the assumptions built into the new programme. A quick review of the chart comes after the jump… Read more
Greek finance minister Yannis Stournaras, left, and IMF chief Lagarde at Monday's meeting.
It may be incomplete and its conclusions subject to debate, but on Monday night eurozone finance ministers got a draft copy of the much anticipated troika report on Greece. As we report online, there’s not much in it we didn’t already know – including the fact Greece will need as much as €32.6bn in new financing if the programme is extended through 2016.
But the language in the report is, as usual, pretty revealing. We’ve posted a copy of the draft here. It makes clear that eurozone creditors will be leaning on Greece pretty heavily for the foreseeable future. This, in spite of the fact the Greek parliament barely passed €13.5bn in austerity measures last week amidst serial defections form its governing coalition.
The most glaring is that Athens will have to find an additional €4bn in austerity measures for 2015 and 2016, meaning the pain isn’t done yet. But it also implies there are some more shorter-term measures that haven’t been completed yet that the troika is expecting.
Greece has revamped its reform effort and fulfilled important conditions…. These steps, which have tested the strength and cohesiveness of the coalition supporting the government, leaving also some scars therein, significantly improve the overall compliance, provided some remaining outstanding issues are solved by the authorities.
IMF managing director Christine Lagarde, during this morning's news conference in Tokyo.
IMF chief Christine Lagarde’s declaration this morning that Greece should be given two more years to hit tough budget targets embedded in its €174bn bailout programme – coming fast on the heels of German chancellor Angela Merkel’s highly symbolic trip to Athens – are the clearest public signs yet of what EU officials have been acknowledging privately for weeks: Greece is going to get the extra time it wants.
But what is equally clear after this week’s pre-Tokyo meeting of EU finance ministers in Luxembourg is there is no agreement on how to pay for those two additional years, and eurozone leaders are beginning to worry that the politics of the Greek bailout are once again about to get very ugly.
The mantra from eurozone ministers has been that Greece will get more time but not more money. Privately, officials acknowledge this is impossible. Extending the bailout programme two years, when added to the policy stasis in Athens during two rounds of elections and a stomach-churning drop in economic growth, means eurozone lenders are going to have to find more money for Athens from somewhere. Read more
IMF's Blanchard unveils report at Tokyo gathering of finance ministers and central bankers.
[UPDATE] After a meeting of EU finance ministers in Luxembourg, Olli Rehn, the European Commission’s economic chief, said he would read the IMF’s analysis on the way back to Brussels. But he cautioned that while the impact of austerity on growth was important to consider, it was also essential to take into account the “confidence effect” budget consolidation has. He pointed to Belgium, which has gone from market laggard to nearly a safe haven after implementing tough austerity measures earlier this year.
Although the headlines generated by last night’s release of the IMF’s annual World Economic Outlook focused on the downgrading of global growth prospects, for the eurozone crisis the most important item in the 250-page report may just be a three-page box on how austerity measures affect struggling economies.
The box – co-authored by IMF chief economist Olivier Blanchard and staff economist Daniel Leigh – argues in stark language that the IMF as well as other major international institutions, including the European Commission, have consistently underestimated the impact austerity has on growth.
For a eurozone crisis response that has piled harsh austerity medicine on not only bailout countries but “core” members with high debt levels –Italy, France and Belgium, for instance – the IMF finding could shake up the debate on how tough Brussels should continue to be on eurozone debtors. As French economist Jean Pisani-Ferry, director of the influential Brussels think tank Bruegel, tweeted yesterday:
[blackbirdpie url="https://twitter.com/BruegelPisani/status/255520457976061952"] Read more
IMF chief Lagarde, left, with the EU Commission's Olli Rehn at last night's meeting in Luxembourg
For those trying to figure out what the highly-anticipated EU treatise to be unveiled at next week’s summit on the future of the eurozone will say, it’s worth having a closer read at the International Monetary Fund report presented last night to eurozone finance ministers at their gathering in Luxembourg.
The concluding statement presented by Christine Lagarde, the IMF chief, contains almost all the elements being weighed by EU leaders who are writing the report, and Lagarde was quite open about the fact she actively consulted two of the institutions involved in its drafting: the European Central Bank and the European Commission. Indeed, Olli Rehn, the commission’s economic honcho, explicitly endorsed the report at a press conference last night.
The most likely areas of consensus are in Lagarde’s three long-term recommendations for a eurozone banking and fiscal union, though several of them remain controversial, particularly in Berlin, and it remains unclear whether the four EU institutions drawing up their plan will be as willing to confront the German government as head-on as the IMF has. Read more
US treasury secretary Timothy Geithner
Timothy Geithner, the US treasury secretary, has occasionally irked his European counterparts with attempts to influence the eurozone’s crisis policymaking, but European officials will be closely listening to him as the clock ticks down to next month’s spring meetings of the International Monetary Fund.
European Union leaders hope to get non-eurozone backing to double the IMF’s funding to $1tn at the gathering. Although the US won’t contribute, Washington is the IMF’s largest shareholder and is widely believed to be behind the insistence of Christine Lagarde, the IMF chief, that no increase will be forthcoming unless the eurozone increases the size of its own €500bn rescue system.
Those interested in tea leaf reading will get their chance today, when Geithner testifies on Capital Hill on the eurozone crisis. The House financial services committee, where Geithner will appear, helpfully released his testimony last night, and it makes clear Geithner is in no mood to back down. Read more
Poul Thomsen, head of the IMF mission to Greece
On Friday, after much of Europe shut down for the week, the International Monetary Fund issued its 231-page report on Greece’s new €174bn bailout, which seems to struggle to keep an optimistic tone about Athens’s ability to turn itself around over the course of the rescue plan.
But the IMF report is worth scrutinising for reasons beyond its gloomy prose: If there’s anyone who might force eurozone leaders back to the drawing board once again, it’s the IMF, which essentially pulled the plug on the first €110bn Greek bailout early last year when it became clear it wasn’t working.
Signs that the IMF is on a bit of a hair trigger litter the new report. Read more
Hungary's Viktor Orban, left, with José Manuel Barroso during an EU summit earlier this year.
Perhaps because it is not in the eurozone, the recent turbulence in Hungary has not gotten a huge amount of attention internationally. But Budapest and Brussels are currently on a collision course that could have significant consequences for the region’s economic stability.
At issue is whether the European Union and the International Monetary Fund will provide financial assistance to Hungary at a time the florint is in free-fall and the government’s borrowing costs are skyrocketing, with 10-year bond yields now above 9 per cent, well above levels where Ireland, Greece and Portugal were forced into bail-outs. Standard & Poor’s downgraded Hungarian bonds Wednesday evening, citing the unpredictability of prime minister Viktor Orban’s economic policies – including his attempt to assert more control over Hungary’s central bank.
In a letter to Orban sent this week by José Manuel Barroso, the European Commission president, and obtained by the FT, Barroso drives a hard bargain. Not only does he “strongly advise” Orban to withdraw the proposed laws governing the central bank, but he makes clear that any assistance will come with tough conditions.
Excerpts after the jump. Read more