國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
time.
The Third Economic Adjustment Programme for Greece
Background. On July 8, 2015, Greece formally requested the Chairperson of the Board
of Governors of the ESM for more stability support in the form of a loan, through the course of three years, in the context of a macroeconomic adjustment program, which, in resemblance to the previous two economic adjustment programs, comprises strict conditionality, with a comprehensive set of reforms and measures in the areas of fiscal sustainability, financial stability, and long term growth.
On August 19, 2015, a memorandum of understanding (MOU) between the EC (on behalf of the ESM) and Greece and the Bank of Greece was concluded. In accordance with Article 13(3) of the ESM Treaty, the MoU detailed the conditionality attached to the financial assistance facility to Greece covering the period of 2015 to 2018. The conditionality would be updated on a quarterly basis, taking into account the progress in reforms reviewed by the ESM officials.
The process of the program launching. The third economic adjustment program for
Greece was somewhat distinct from the previous two. By the time this thesis was composed, there are a series of official documents with regard to the process, from the request of the Greek government to the MoU between the parties involved, listed on the EC’s website.
However, there was not yet a comprehensive document detailing the third economic
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
adjustment program. Therefore, the information presented in this section is compiled from various official documents and scholarly papers, rather than from one single document.
The program initially started from the Request from the Greek Government and ESM’s
Assessment (Directorate-General for Economic and Financial Affairs, 2015).
Since May 2010, over the course of the two economic adjustment programs, the Greek banking sector has been restructured, consolidated, and has undergone a series of significant reforms.
Having undergone the reforms, yes, but painstakingly. Towards the end of 2014, the situation of the banking sector deteriorated dramatically amid “increased state financing risks, strong deposit outflows, a worsened macroeconomic development and, more recently, due to the implementation of administrative measures designed to stabilize the funding situation of banks and preserve financial stability.”
The market seemed to have smelled a sense of insecurity due to the grim outlook for the Greek economy. In 2015, the liquidity of Greek banks seriously deteriorated and treaded into a very dangerous zone. Until the end of May, 2015, deposits of 30 billion euros, or 19% of the total amount, left the Greek banking sector. Worse, fretting that the capital outflow might lead to a collapse in confidence, since June 29, 2015, a bank “holiday” was imposed on Greek banks with rigid restrictions on deposit access.
The Greek banks held a notable amount of government papers and significant part of the
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
collateral used for Emergency Liquidity Assistance (ELA) purposes, which included Greek Government related assets. With regard to this, it was necessary to stage an adequate capital backstop to restore the confidence of depositors and markets in Greek banks and safeguard financial stability in Greece.
The effect of financial instability in Greece would be a matter of significance beyond the financial sector, with the potential of reaching to other segments of the economy. The
imposition of capital controls and of a bank holiday have already taken an extensive toll on Greece’s real economy, through a number of channels such as investment, trade, and tourism.
Thus, the capital controls had strong impacts on growth and employment prospects.
Moreover, Greek banks still had a number of branches and subsidiaries in other countries which could cause spillover effects. In some of the EU member states Greek banks'
subsidiaries accounted for 15% to 25% of the local banking sector, which made Greek banks to have a systemic importance in those countries. Finally, an uncontrolled collapse of the Greek banking system and of Greece as a sovereign borrower would invariably create doubts on the integrity of the euro area as a whole. Thus, realizing that in the absence of support by the ESM, financial stability risks for Greece would become unmanageable and the banking sector would inevitably languish, the Greek government reached out for help, once again.
Prospect for Greece’s debt condition was hardly more optimistic, either. The EC projected three possibilities with regard to the implementation of the reforms. The first
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
assumed “the full implementation of the reforms in the aide memoire and the corresponding growth effects,” the second assumed “partial compliance with the aide memoire,” and the third “reflected the IMF baseline as published on July 2, 2015.” In all three case scenarios the debt-to-GDP ratios were on a declining path. The Greek debt-to-GDP ranges under the three case scenarios was 138% to 150% in 2020 and 124% to 142% in 2022, well above the Troika targets set in November 2012 of 124% in 2020 and below 110% in 2022. The parameters that led to the deterioration were, among others, lower macroeconomic growth due to the weaker implementation of structural reforms, and a lowering of the fiscal targets and privatization receipts. .
The EC estimates that Greece’s net financing needs at around 86 billion euros over the three-year program horizon. This includes needs for the recapitalization of the banking sector (up to 25 billion euros), medium- and long-term debt service including loans (approximately 54 billion euros), and around 15 billion euros for arrears clearance and built-up of cash buffers. Two billion euros from primary surplus and six billion euros from privatization proceeds are also accounted for. (European Stability Mechanism, 2015)
Receiving the projected financing needs and sources, the ESM expected that Greece would have a financing gap of at least 74 billion euros over the period of 2015 to 2018, and that would need to be covered by new external financing (the IMF considered that the estimate should have been four billion euros higher). Given the profile of the needs, it was
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
concluded that the disbursement had to be front-loaded.
Signing of the program. On July 12, 2015, after several months of negotiation, which
for several times appeared in deadlock, the Greek Prime Minister, Alexis Tsipras came to an agreement with lenders for a new ESM program. Greece would get a loan of up to 86 billion euros over 2015 to 2018. In return, Greece was mandated to, once again, go through series of reforms.
In the Memorandum of Understanding between the European Commission Acting on
Behalf of the European Stability Mechanism and the Hellenic Republic and the Bank of Greece (European Commission, 2015), the recovery strategy takes into consideration the
needs for social justice and fairness, and actions to tackle tax evasion, fraud, and strategic defaulters are priority concerns. Product market reforms sought to eliminate the rents accruing to vested interest groups and pension reforms focused on measures to remove exemptions and end early retirement.