The crisis, Greece and the Eurozone

The crisis that torments Greece and the Eurozone since 2009 is a very complex phenomenon. Started in 2007 in the U.S. it expanded as a tsunami into Europe, in 2008. It highlighted the weaknesses of the Treaty on the European Union, as to the economic wing of the economic and monetary union. It threatened with bankruptcy the weak links of the Eurozone, such as Greece, Ireland and Portugal. It threatens to break up the Eurozone, whose leaders, react spasmodically and belatedly to the requirements of the credit rating agencies and the financial markets. Some Greeks blame the wastage, the corruption and the indolence during the five and a half years of government by the New Democracy. Others blame the faulty negotiation, the submission to the directives of the troika and the non-implementation of measures agreed with that troika by the government of Pasok. All Greeks blame the Germans, who, affected by the Weimar syndrome of high inflation, refuse the issue of eurobonds, which would solve the financing problems for all states of the Eurozone and would support economic development, necessary for overcoming the crisis. Germans blame the wasteful and lazy Greeks who are unable to impose to themselves German-like fiscal discipline. There are certainly half-truths in all the above allegations. However, a fair assessment of the situation necessitates a consideration of the crisis as a multifaceted phenomenon: global, European and Greek. In what follows we underline certain facts, which are often set aside in the analyses of the problems of \Greece and we recall the – up to date ineffective – efforts of the leaders of the Eurozone to solve these problems, so as to help the reader to understand the thorny declaration of the Eurogroup of 21 February 2012.

The global crisis

The global financial crisis was triggered by a complex interplay of valuation and liquidity problems in the United States banking system in 2008. ^{The bursting of the U.S. housing bubble, which peaked in 2007, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts.}

Many causes for the financial crisis have been suggested, with varying weight assigned by experts. The United States Senate issued the Levin–Coburn Report, which found "that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street." Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. All these are usually forgotten by some analysts of the crisis, which hit Greece at the end of 2009.

The role of credit rating agencies

A big responsibility for the emergence and the development of the crisis in the Eurozone and notably in Greece have the credit rating agencies (CRAs) the three most important of which are: Moody's Investors Service (U.S.); Standard & Poor's (U.S.); and Fitch Ratings (U.S.). Together, these three American CRAs hold more than 90% of the global credit rating market. The views of CRAs can wipe millions off bond and share prices, as well as make credit more expensive for badly noted entities. Consequently, credit ratings have a significant impact on the operation of the markets and on the trust and confidence of investors and consumers.

In fact, the CRAs contributed significantly to the global financial crisis, which started in 2007 in the United States. They clearly underestimated the risk that the issuers of certain more complicated financial instruments might not repay their debts. As they gave the highest possible ratings to many of those complex instruments, inexperienced investors felt encouraged to purchase them, even without assessing properly the risks. As market conditions were worsening, CRAs failed to reflect this promptly in their ratings. These failures by CRAs were combined with an imprudent approach of the investors. As a result, credit was granted even if it would not be justified by economic fundamentals. They were also accused of potential conflicts of interest, because they are paid as consultants by the very banks whose debt they rate.

The Greek problem and the reaction of the Eurozone

In 2009, due to the global financial crisis and to the worse recession since 1929, twenty of the EU’s 27 Member States (including Germany and France) were running deficits above the threshold of 3% of GDP [see section 7.3.2] and the Commission and the Council had to give them time, in order to return to fiscal orthodoxy. The problems of many Member States of the Eurozone, such as Greece, Ireland, Portugal and Spain continued and worsened in 2010 and 2011.

Greece was a special case. Partly because of the faults of her governments, which brought the budgetary deficit from 3.7% of GNP in 2008 to 12.7% at the end of 2009, and partly because of the global financial and economic crises, which stopped abruptly the until then constant growth of her GNP, Greece was found, in the beginning of 2010, not only with a vastly excessive deficit, but at the verge of bankruptcy. The Greek crisis was a test for the solidity of the European economic and monetary union. It could seriously harm it with the attacks of speculators against its feeble rings, as happened with the first effort of creation of EMU in 1971 [see section 7.2.1]. It could, on the contrary, become an incentive to strengthen the economic side of EMU, which was originally rather feeble and consolidate the spirit of solidarity inside the euro area. As we will see in the next section, the leaders of the Eurogroup were forced, first, to give financial support to Greece and, then, to devise a European Mechanism of financial stabilisation with the participation of the International Monetary Fund. Greece, on its side, was obliged to adopt an ambitious plan to correct its fiscal imbalances and to reform its economy by 2014, under the supervision of the European Commission, the European Central Bank and the IMF. Thereafter, a new notice was given to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit [Decision 2011/734, amended by Decision 2011/791].

According to a German school of thought, the treaty on the functioning of the EU (following the treaty on the European Community) prohibits a financial assistance to a euro area Member State in difficulties. In fact, the treaty excludes the possibility for the governments of these Member States to have recourse to overdraft facilities or any other type of credit facility with the European Central Bank or with national central banks (Article 123 TFEU, ex Article 101 TEC) or to have privileged access to financial institutions (Article 124 TFEU, ex Article 102 TEC). This strict interpretation of the TFEU brought Greece to the brink of bankruptcy, since the fiscal errors of its own governments, added to the economic and financial problems brought about by the global financial crisis, raised substantially the cost of its borrowing from the world markets [see also section 7.3.2]. It was only after the realisation that the fall of a euro country would bring a domino effect on other countries of the euro area, that Eurogroup Ministers, on 2 May 2010, concurred with the Commission and the European Central Bank that providing a loan to Greece was warranted to safeguard financial stability in the euro area as a whole. In the context of a three year joint programme with the IMF, supported by strong conditionality, the financial package makes available € 110 billion to help Greece meet its financing needs, with euro area Member States ready to contribute for their part € 80 billion, of which up to € 30 billion in the first year. At the same time, the European Central Bank decided to accept as collateral of marketable debt instruments issued and guaranteed by the Greek Government [Decision ECB/2010/3].

Under the pressure of the American credit rating agencies and the speculators on the global credit and money markets, who were battering Greece, Spain, Portugal and other euro countries, EU economic and financial ministers (ECOFIN) set aside German objections, remembering that Article 122.2 of the Treaty on the functioning of the EU (ex Article 100 TEC) foresees financial support for Member States in difficulties caused by exceptional circumstances beyond their control. They thus conceived, on 10 May 2010, a European Financial Stabilisation mechanism (EFSM) of 750 billion EUR [Regulation 407/2010].

On 25 March 2011, the European Council decided to amend Article 136 of the Treaty on the Functioning of the European Union with regard to a stability mechanism for Member States whose currency is the euro [Decision 2011/199]. The European Council agreed that, as this mechanism is designed to safeguard the financial stability of the euro area as whole, Article 122(2) of the TFEU will no longer be needed for such purposes. The Treaty establishing the European Stability Mechanism (ESM) was signed, on 11 July 2011, by the Eurogroup ministers. The European Stability Mechanism (ESM) will replace, in June 2013, the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF) [see section 7.3]. The stability mechanism will provide the necessary tool for dealing with such cases of risk to the financial stability of the euro area as a whole as have been experienced in 2010, and hence help preserve the economic and financial stability of the Union itself. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.

On 26 October 2011, the Euro area heads of State or government agreed to support a new programme for Greece, together with the IMF and with Private Sector Involvement (PSI), meaning a nominal discount of 50% on notional Greek debt held by private investors. Euro area Member States will contribute to the PSI package up to 30 billion euro. A new EU-IMF multiannual programme financing up to 100 billion euro is accompanied by a strengthening of the mechanisms for the monitoring of implementation of the reforms. For euro area Member States in excessive deficit procedure, the Commission and the Council will be enabled to examine national draft budgets and adopt an opinion on them before their adoption by the relevant national parliaments. The European Financial Stability Facility (EFSF) resources could be leveraged yielding around 1 trillion euro by providing credit enhancement to new debt issued by Member States, thus reducing the funding cost and/or by maximising its funding arrangements with a combination of resources from private and public financial institutions and investors [see also section 7.3].

The statement of the Eurogroup of 21 February 2012

On 21 February 2012, the finance ministers of the euro area, after over 13 hours of tense negotiations in Brussels have agreed on a support of 130 billion euro (£ 110bn, $ 170bn) for Greece; revising upwards the programme agreed four months earlier. Greece needs funds to avoid bankruptcy on March 20, 2012, when large loans must be repaid. The bailout will reduce the debt of the Greek government from some 160% of GDP to 120.5% by 2020. Ιn addition, private owners of the Greek debt will bear losses of 53.5% on the value of their bonds. In return, Greece should accept a permanent monitoring economic mission of the EU and establish a special account to service its debts. The Eurogroup said in the following statement that it welcomed the agreement reached with the Greek government on policy measures that form the basis for the successor program.

The main points of the declaration of the Eurogroup of 21 February are:

• Greece is committed to reducing its debt to 120.5% of GDP by 2020;
• private owners of the Greek debt will bear losses of 53.5% on the value of their bonds, but the real loss is not less than 70%;
• economic management of Greece will be subject to ongoing monitoring by  on site experts of the euro area;
• Greece will amend its constitution to give priority to repayment of its debt, rather than to the financing of government services;
• Greece will establish a special account controlled separately from its main budget, which should, each time, contain enough money to service its debts for the next three months;
• the leaders of the two coalition parties should provide assurances regarding the implementation of the programme.

The full text of the statement

The Eurogroup welcomes the agreement reached with the Greek government on a policy package that constitutes the basis for the successor programme. We also welcome the approval of the policy package by the Greek parliament, the identification of additional structural expenditure reductions of € 325 million to close the fiscal gap in 2012 and the provision of assurances by the leaders of the two coalition parties regarding the implementation of the programme beyond the forthcoming general elections.

This new programme provides a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing and hence for safeguarding financial stability in Greece and in the euro area as a whole.

The Eurogroup is fully aware of the significant efforts already made by the Greek citizens but also underlines that further major efforts by the Greek society are needed to return the economy to a sustainable growth path.

Ensuring debt sustainability and restoring competiveness are the  main goals of the new programme. Its success hinges critically on its thorough implementation by Greece. This implies that Greece must achieve the ambitious but realistic fiscal consolidation targets so as to return to a primary surplus as from 2013, carry out fully the privatisation plans and implement the bold structural reform agenda, in both the labour market and product and service markets, in order to promote competitiveness, employment and sustainable growth.

To this end, we deem essential a further strengthening of Greece's institutional capacity. We therefore invite the Commission to significantly strengthen its Task Force for Greece, in particular through an enhanced and permanent presence on the ground in Greece, in order to bolster its capacity to provide and coordinate technical assistance. Euro area Member States stand ready to provide experts to be integrated into the Task Force.

The Eurogroup also welcomes the stronger on site-monitoring capacity by the Commission to work in close and continuous cooperation with the Greek government in order to assist the Troika in assessing the conformity of measures that will be taken by the Greek government, thereby ensuring the timely and full implementation of the programme.

The Eurogroup also welcomes Greece's intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece's debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter's debt service directly to a segregated account of Greece's paying agent.

Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible. The Eurogroup acknowledges the common understanding that has been reached between the Greek authorities and the private sector on the general terms of the PSI exchange offer, covering all private sector bondholders. This common understanding provides for a nominal haircut amounting to 53.5%. The Eurogroup considers that this agreement constitutes an appropriate basis for launching the invitation for the exchange to holders of Greek government bonds (PSI). A successful PSI operation is a necessary condition for a successor programme. The Eurogroup looks forward to a high participation of private creditors in the debt exchange, which should deliver a significant positive contribution to Greece's debt sustainability. 

The Eurogroup considers that the necessary elements are now in place for Member States to carry out the relevant national procedures to allow for the provision by EFSF [European Financial Stability Mechanism] of: (i) a buy back scheme for Greek marketable debt instruments for Eurosystem monetary policy operations, (ii) the euro area's contribution to the PSI exercise, (iii) the repayment of accrued interest on Greek government bonds, and (iv) the residual (post PSI) financing  for the second Greek adjustment programme, including the necessary financing for recapitalisation of Greek banks in case of financial stability concerns.

The Eurogroup takes note that the Eurosystem  (ECB and NCBs) holdings of Greek government bonds have been held for public policy purposes. The Eurogroup takes note that the income generated by the Eurosystem holdings of Greek Government bonds will contribute to the profit of the ECB and of the NCBs. The ECB’s profit will be disbursed to the NCBs, in line with the ECB’s statutory profit distribution rules. The NCBs’ profits will be disbursed to euro area Member States in line with the NCBs’ statutory profit distribution rules.

The Eurogroup has agreed that certain government revenues that emanate from the SMP [Securities Markets Program] profits disbursed by NCBs may be allocated by Member States to further improving the sustainability of Greece's public debt. All Member States have agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility so that the margin amounts to 150 basis points.  There will be no additional compensation for higher funding costs. This will bring down the debt-to-GDP ratio in 2020 by 2.8pp and lower financing needs by around 1.4 bn euro over the programme period. National procedures for the ratification of this amendment to the Greek Loan Facility Agreement need to be urgently initiated so that it can enter into force as soon as possible.

Furthermore, governments of Member States where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income accruing to their national central bank stemming from this portfolio until 2020. These income flows would be expected to help reducing the Greek debt ratio by 1.8pp by 2020 and are estimated to lower the financing needs over the programme period by approximately 1.8 bn euro. The respective contributions from the private and the official sector should ensure that Greece's public debt ratio is brought on a downward path reaching 120.5% of GDP by 2020.

On this basis, and provided policy conditionality under the programme is met on an ongoing basis, the Eurogroup confirms that euro area Member States stand ready to provide, through the EFSF and with the expectation that the IMF will make a significant contribution, additional official programme of up to 130 bn euro until 2014.

It is understood that the disbursements for the PSI operation and the final decision to approve the guarantees for the second programme are subject to a successful PSI operation and confirmation, by the Eurogroup on the basis of an assessment by the Troika, of the legal implementation by Greece of the agreed prior actions. The official sector will decide on the precise amount of financial assistance to be provided in the context of the second Greek programme in early March, once the results of PSI are known and the prior actions have been implemented.  

We reiterate our commitment to provide adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.

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