The agreement regarding Greece at the Euro Summit

Is it an agreement?

What was published is a statement, referred to as Euro Summit¹ Statement.

The essence of it, is that the Eurozone leaders want to find a deal, subject to Greece taking some steps first. In other words it is a political agreement not a legal agreement yet.

What about the sustainability of the current Greek debt?

The Statement notes that there are serious concerns about the sustainability of the Greek debt, due to the easing of policies in the last 12 months.

The Statement states that the Eurogroup stands ready to consider, additional measures (possible longer grace and payment periods) aiming at ensuring the gross financing needs remain at a sustainable level. The Summit stressed that nominal haircuts of the debt cannot be undertaken.

The above measures will be conditional upon full implementation of the measures agreed in the new possible program through the ESM, after the first positive completion of a review.

What are the immediate next steps?

Essentially the statement requires Greece to:

• legislate certain priority measures by July 15 (see below); and
• endorsement of all commitments included in the Euro Summit Statement by the Greek Parliament.

Then:

• National procedures must be completed. As Donald Tusk — Euro Summit President — said in his press conference, the approval of several national parliaments is required, including of the Greek parliament, before negotiations on an ESM² program formally begin; and
• The pre-conditions of the Article 13(1) of the ESM Treaty have been met (see below).

Assuming the above happen, the Institutions will be mandated to start negotiating an MoU³ for an ESM loan. It is not entirely clear as to whether all the other pre-conditions that are referred to in the Statement, are pre-requisites for commencement of negotiations as there are some conflicting statements (evidence of hard negotiations). However, from various parts of the Statement (including measures which are to be legislated by July 22 and other measures required without a specific deadline), it seems that the “ball is in Greece’s court” to show “good will” in order to reach the financing deal it wants.

What are the measures to be adopted by July 22?

The measures that need to be adopted are:

the adoption of the Code of Civil Procedure, which is a major overhaul of procedures and arrangements for the civil justice system and can significantly accelerate the judicial process and reduce costs;

the transposition of the BRRD⁷ into Greek law with support from the European Commission. This is the Directive on the recovery and resolution of credit institutions and investment firms. One of the available tools in the Directive (which did not exist in the current Greek legislation) is the “bail in tool.”

What are the next steps for the financial assistance by the ESM?

Once the assessment is complete the Board of Governors may decide to grant, in principle, support.

After the above the European Commission (in liaison with the ECB and the IMF) will negotiate with Greece the MoU detailing the conditionality attached to the financial assistance facility. In parallel the Managing Director of the ESM shall prepare a proposal for a financial assistance facility agreement (including the financial terms and conditions of the instrument).

What are the other measures included in the Statement?

In outline only:

• Pension reforms;
• Product market reforms (including Sunday trading, sales periods, pharmacy ownership, milk and bakeries etc);
• Privatization of the electricity transmission network operator (unless replacement measures can be found that have equivalent effect on competition);
• Reform of labor markets;
• Strengthen the financial sector (including decisive actions for non performing loans, strengthening the governance of the HFSF⁸ and the banks, in particular eliminating any possibility for political interference especially in the appointment processes);
• Develop a scaled up privatization process. Valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatizations. The targeted amount is for €50 billion, of which €25 billion will pay for the re-capitalization of the Greek banks, €12.5 billion will be used for decreasing the debt to GDP ratio and €12.5 billion will be used for investment. The fund is to be established in Greece, managed by the Greek authorities under the supervision of the EU Institutions;
• To modernize and significantly strengthen the Greek administration, but also to reduce its costs;
• To fully normalize working methods with the Institutions, including the necessary work on the ground in Athens, in order to improve implementation and programming. The Euro Summit stresses that “implementation is key” and welcomes the Greek authorities to request technical support by the Institutions by July 20;
• With the exception of the humanitarian crisis bill, the Greek government is required to re-examine and amend legislation which was introduced (counter to the February 20 agreement) by backtracking on previous program commitments.

What are the pre-conditions of Article 13(1) of the ESM Treaty (the pre-requisite to start negotiations for the ESM assistance)?

The conditions set out in Article 13(1) of the ESM Treaty are that European Commission, in liaison with the ECB, must:

• assess the existence of a risk to the financial stability of the euro area as a whole or of its Member States, unless the ECB has already submitted an analysis under Article 18(2);
• assess whether public debt is sustainable. Wherever appropriate and possible, such an assessment is expected to be conducted together with the IMF; and
• assess the actual or potential financing needs of the ESM Member concerned.

What are the priority measures that Greece has to legislate by July 15?

These are:

• the streamlining of the VAT system and the broadening of the tax base to increase revenue;
• upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform program;
• the safeguarding of the full legal independence of ELSTAT⁴;
• the full implementation of the relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union⁵, in particular by making the Fiscal Council⁶ operational before finalizing the MoU and introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions.

What is the size of the financial assistance required by Greece?

The Statement notes of the possible program financing needs of between €82 and 86 billion.

It further notes that the urgent financing needs of Greece are estimated to an amount of €7 billion by July 20 and an additional €5 billion by mid-August.

The Statement further acknowledges that a buffer of €10–25 billion will be required for the banking sector.