Euro zone considers three options for Greece bailout exit next year

Greece’s Finance Minister Gikas Hardouvelis speaks during an interview with Reuters in Athens November 5, 2014. Greece will quit its bailout programme at the end of the year. — Reuters pic
Greece’s Finance Minister Gikas Hardouvelis speaks during an interview with Reuters in Athens November 5, 2014. Greece will quit its bailout programme at the end of the year. — Reuters pic

BRUSSELS, Nov 6 — Euro zone finance ministers will consider three options today for what happens after Greece exits its bailout at the end of the year, seeking to balance the need to reassure investors with the demands of domestic Greek politics.

The Greek government has staked its survival on exiting the bailout a year early, a move that will please voters hammered by austerity measures imposed by the EU and the IMF, but which has already rattled markets, pushing up Greek bond yields.

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

After two international bailouts totalling €240 billion (RM995 billion) since 2010, when private investors refused to lend to Athens any more, Greece wants to switch back to market financing from the start of next year.

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

Greece and euro zone finance ministers will therefore discuss today ways to provide Athens with fall-back financing to boost investor confidence, while addressing domestic political sensitivities.

“Greece needs us to continue to support it, not in the same way as now, not with the same mechanism,” France’s Finance Minister Michel Sapin told reporters as he arrived for the meeting with euro zone counterparts. “France is ready for Europe to continue its support.”

All three options to be discussed include a financial cushion, using €11 billion already granted to recapitalise Greek banks, but which turned out not to be needed, euro zone officials said.

New credit line

In the first option, the recapitalisation money, now in European Financial Stability Facility bonds, would be returned to the EFSF and Greece would instead apply for and get an Enhanced Conditions Credit Line (ECCL) from the European Stability Mechanism — the successor of the EFSF.

This would allow Greece to say it is not longer under a programme, make it possible for euro zone ministers to increase the size of the credit line above the 11 billion if necessary and set clear conditions for the availability of the money, even if it is not drawn upon.

But obtaining an ECCL would mean Greece has to sign a new “memorandum of understanding”, politically sensitive in Greece where the previous MOU detailed austerity reforms demanded by lenders, resented by Greeks as a loss of sovereignty by Athens.

This option is also relatively lengthy — it would take a minimum of five weeks to complete — and tougher on conditions because the ECCL could be cancelled if Greece fails to meet reform targets and Athens would then have to apply for new, fully-fledged bailout.

The second option would take less time — around three weeks.

Under this scenario, the availability of the €11 billion for bank recapitalisation would be extended beyond 2014 and documents would be changed to allow the funds to be used for Greek debt servicing, rather than just bank capital.

The money would then become a financial buffer that Greece could draw on, but a buffer limited to the €11 billion. The EFSF could buy back its bonds for cash if Athens meets agreed reform criteria, but there would be no need for a formal memorandum of understanding.

If Greece did not meet the targets, it would not get the money, but the cushion would remain in place, ready for when the goals are met.

The European Commission would monitor reform progress under EU rules and the role of the European Central Bank and the International Monetary Fund would have to be defined. The IMF would have observer status at best, which several euro zone countries see as insufficient.

The ECB would have to decide if such an arrangement was enough to make Greece eligible for its emergency bond buying programme OMT.

Extend the bailout

The third option is to extend the current bailout by six to 15 months and it would take about 2-3 weeks to get approved.

That would give Greece more time to meet the criteria for the release of the last, €1.8-billion, tranche of the existing programme, which will be lost unless it is disbursed before the end of the year.

Euro zone finance ministers would then agree that the €11 billion in unused bank recapitalisation funds could be reused for other purposes after they are returned to the EFSF at the end of the year under a one-year extension of the bailout.

Because the money would return to the EFSF, it would immediately lower Greece’s debt-to-GDP ratio.

The role and involvement of the IMF would have to be decided, but there would be a way to avoid referring to a memorandum of understanding through the use of the term “letter of intent”.

But this option would still carry the political stigma of Greece still being under a bailout programme. — Reuters