Written by Stanislas de Finance, Josephine Vanden Broucke, Ralf Drachenberg
Updated on 16 July:
Originally planned for 12 July an extraordinary European Council meeting on the financial situation in Greece has been cancelled and The Euro Summit on Greece took place.
On 12 July, Heads of State or Government will hold an extraordinary European Council meeting on the financial situation in Greece. This brings the number of meetings of Heads of State or Government dealing with the financial situation in Greece in the form of a European Council or Euro Summit meeting to a total of 19 since 2010. European Council President Donald Tusk summed up the importance of this upcoming European Council as “the most critical moment in the history of the eurozone”.
Following the election of Greek Prime minister Alexis Tsipras on 26 January 2015, negotiations on unblocking the last tranche of €7.2 billion of European aid, which lasted for nearly six months, finally collapsed on the 27 July 2015, mainly due to disagreements on the extent of fiscal and pension reforms. Following the abandonment of negotiations by the Greek government and its decision to hold a referendum, Greece’s previous arrangement with the European Financial Stability Facility (EFSF), namely the Greek Master Financial Assistance Facility Agreement (MFFA), expired on 30 June 2015. On the same day, Greece defaulted on a €1.5 billion International Monetary Fund (IMF) repayment. In parallel, an internal IMF analysis admitted that Greece’s debt repayment package is unsustainable and estimated that Greece would need 30 per cent of its debt to be written off and an additional bailout package worth €51.9 billion over the next three years in order to stay afloat.
In the referendum on 5 July 2015, around 61.3 per cent of Greeks voted to reject the most recent draft offer made by Greece’s creditors before negotiations failed. At the same time a recent opinion poll indicated that the majority (70 per cent) of Greeks want Greece to remain in the eurozone.
On 8 July, the Greek government sent a formal request to the Eurogroup Chair and the European Stability Mechanism (ESM) Managing Director for a new three-year assistance program from the ESM bailout fund, in order to safeguard the financial stability of Greece and the Euro area as whole, in line with articles 12 and 13 of the ESM Treaty. In return, Greece would commit to implementing a comprehensive set of measures and reforms in order to ensure debt sustainability and boost growth prospects, as confirmed by Mr Tsipras’ promise of credible reforms made before the European Parliament plenary on the same day.
At the 7 July Euro Summit the euro area authorities reached an agreement which outlined their readiness to do all that is necessary to ensure financial stability in the euro area. Greek Prime Minister Alexis Tsipras committed to present a new request for financial assistance from the ESM. The Greek government has submitted a proposal for a comprehensive and specific reform agenda on 9 July 2015. This proposal requests €53.5 billion to help cover Greece’s financing needs until 2018, a review of primary surplus targets and “reprofiling” the country’s long-term debt. At the same time the Greek government committed amongst other things to carry out VAT reforms (e.g. to phase out tax breaks for its islands and shipping companies), pension reforms (e.g. enforce strong disincentives for early retirement), as well as to better enforce tax collection. These commitments even exceed those which were rejected in the referendum.
European Parliament’s plenary debate
During the European Parliament’s plenary debate on 8 July 2015 in Strasbourg on the “Conclusions of the European Council (25-26 June 2015) and of the Euro Summit (7 July 2015) and the current situation in Greece”, the main discussion concentrated on the Greek situation. Nearly all MEP interventions exclusively referred to the speech of Greek Prime Minister Alexis Tsipras. There were also repeated demands by several of the main political groups to invite the Parliament’s President to attend future Euro summits. At the outset of the debate, European Commission President Jean-Claude Juncker repeated the message he gave after the Euro Summit that the European Commission has “a Grexit scenario prepared in detail”, while adding that this is something he is “strongly against”. To this European Council President Tusk added that the euro did not lead to the Greek sovereign debt crisis, but that this was due to overspending over a long period.
Greece’s financial and economic situation
The economic situation has been deteriorating quickly since the end of 2014. Greece has now slipped back into recession as GDP shrunk by 0.4% and 0.2% quarter on quarter (q-o-q) in Q4/2014 and Q1/2015, respectively. This was mainly driven by a significant drop in investment compounded by depositors moving their funds out of Greek banks (see chart 1), while households’ consumption remained flat. Exports also decreased over the last semester. By contrast, growth in the euro area accelerated modestly to 0.4% q-o-q over the two same quarters.
The state of public finances is also alarming. Greece has now effectively run out of cash and could not prevent the default on the IMF loan repayment of €1.5 billion. As a consequence, Greece can no longer receive any further financial assistance from the IMF as long as its arrears are not cleared, although IMF technical assistance remains available. Missing the IMF loan repayment deadline automatically triggered the MFFA’s cross-default clause. Nevertheless, the EFSF’s Board of Directors decided not to request immediate reimbursement of the EFSF loans to Greece but to reserve its right to act in the future, in line with the EFSF Framework Agreement.
Meanwhile, the ECB Governing Council has decided to maintain the provision of Emergency Liquidity Assistance (ELA) available to Greek banks since 26 June, at the level of €89 billion. However, the conditions for Greek banks to access Greek central bank funds have recently been tightened in the form of raised haircuts on collateral. As a result, the Greek government had to impose and maintain capital controls and close banks from 28 June onwards to stop the acceleration of the run on Greek banks and ensure financial stability. Daily ATM withdrawals have been limited to €60 per individual while pension payments have been safeguarded despite the fact that banks will soon run out of liquidity.
Before the Heads of State or Government discuss Greece’s new proposal on Sunday 12 July 2015, the eurozone finance ministers are scheduled to meet on Saturday 11 July 2015. European Council President Donald Tusk tweeted: “Final deadline ends this week. Either we achieve agreement this week in the Eurogroup or I will convene a European Council on Sunday afternoon.” The European Council will be preceded by another short Euro Summit, as indicated by European Council President Donald Tusk.
Several other repayments are due in the coming months, notably a €3.5 billion bond redemption to the European Central bank (ECB) due on 20 July 2015 and again on 20 August worth €3.2 billion. Overall, about €17 billion are owed to the ECB and the IMF through to the end of 2016 (see chart 3).
As the previous arrangement with the European Financial Stability Facility expired on 30 June 2015, Greece and its creditors will now need to restart negotiations regarding a new package. Following a potential agreement between the Greek government and the Eurogroup, National Parliaments in 7 out of the 19 Eurozone countries must approve the ESM program. (This includes Greece, Germany, Finland, Italy, Portugal, Slovenia, Estonia and possibly Malta.)
Provisional time table on next steps
|09 July, midnight||Greek government||Submission of proposals for a comprehensive and specific reform agenda|
|10 July||Greek Parliament||Vote on ‘prior actions’ and authorise the Government to negotiate|
|10 July||Commission in liaison with ECB||Assessment of the Geek proposal|
|11 July||Eurogroup||Evaluation of the Greek proposal / negotiations|
|12 July||Euro summit||Evaluation of the Greek proposal / negotiations|
|12 July||European Council||Evaluation of the Greek proposal / negotiation|
|13 July||ECB||Non-monetary policy meeting to decide on the provision of ELA|
|13 July||Eurogroup||Monthly Eurogroup meeting|
|13 July||Greek government||Loan repayment due to the IMF (worth €0.45bn)|
|Not before 13 July||German Bundestag||Mandate given to the Finance Minister to start negotiations on a new ESM program|
|Post-13 July||Greek government, the ‘Institutions’||ESM negotiations to start|
|16 July||ECB||Monetary Policy Meeting|
|20 July||Greek government||Bond repayment due to the ECB (worth €3.5bn)|
|After a potential agreement||National Parliaments||Approval of potential new ESM program for Greece|