22/3/2015
By Peter Spiegel
If you didn’t know what the standoff over Greece’s bailout was all about, Alexis Tsipras, the new Greek prime minister, has provided an excellent primer in a letter sent a week ago to his German counterpart, Chancellor Angela Merkel, who he is scheduled to meet Monday night in Berlin.
Our story about the March 15 letter, which the FT obtained a copy of, can be found here. But as is our normal practice, we thought we’d provide readers of the Brussels Blog a bit more detail – including a copy of the letter, which we’ve posted here.
It’s worth noting that eurozone officials say a similar letter was sent to a select group of other leaders, including François Hollande, the French president; Mario Draghi, the European Central Bank chief; and Jean-Claude Juncker, president of the European Commission.
For those who are having a hard time following every twist an turn in Tsipras’ dispute with his bailout lenders, the letter is filled with a lot of jargon and references to multiple previous exchanges of letters, which can be confusing even to a Greek crisis veteran. For that reason, below is an annotated version of the Tsipras letter, which is our modest attempt to explain its intricacies to the uninitiated.
The letter starts off by referring to a February 20 agreement by the eurogroup – the committee of all 19 eurozone finance ministers which is responsible for overseeing the EU’s portion of Greece’s €172bn bailout. That was the meeting where ministers ultimately agreed to extend the Greek bailout into June; it was originally to run out at the end of February, and the prospect of Greece going without an EU safety net had spurred massive withdrawals from Greek bank deposits, which many feared was the start of a bank run.
The letter’s first paragraph also refers to a February 18 letter sent by Yanis Varoufakis, the Greek finance minister, to Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup. A copy of that letter can be found here. Its purpose was to formally request an extension of the existing bailout, something Tsipras had resisted since coming into office.
«Dear Chancellor,
I am writing to you to express my deep concern about developments since the 20th February 2015 Eurogroup agreement, which was preceded two days earlier by a letter from our Minister of Finance outlining a number of issues that the Eurogroup ought to resolve, issues which I consider to be important, including the need:
(a) To agree the mutually acceptable financial and administrative terms the implementation of which, in collaboration with the institutions, will stabilise Greece’s financial position, attain appropriate fiscal surpluses, guarantee debt stability and assist in the attainment of fiscal targets for 2015 that take into account the present economic situation.»
This is a fancy way of saying that the two sides can’t agree on what reform measures must be adopted before Greece can get some of the €7.2bn remaining in the existing bailout and Tsipras wants the terms clarified quickly.
«(b) To allow the European Central Bank to re-introduce the waiver in accordance with its procedures and regulations.»
Given the economic climate, Greek banks have needed to borrow from the ECB at extremely cheap rates since they frequently can’t raise money for their day-to-day operations on the open market. But the ECB needs collateral for these loans, and one of the forms of collateral has always been government bonds owned by the banks. Well, as Greece’s fiscal situation deteriorates, those bonds are worth less and less – until, in the view of many central bankers, they’re too risky to accept as collateral at all. That’s been the situation for Greek bonds for a while, but up until Tsipras was elected, the ECB had a waiver in place allowing the central bank to accept the bonds as collateral since Athens was part of a bailout that was aimed at getting its finances back on track. Within days of Tsipras forming a government, the ECB withdrew the waiver, arguing that Athens was no longer committed to completing the bailout. Tsipras wants the wavier reinstated, since Greek banks are now relying on more expensive emergency loans from the Greek central bank instead of the ECB’s normal lending window.
«(c) To commence work between technical teams on a possible new Contract for Recovery and Development that the Greek authorities envisage between Greece, Europe and the International Monetary Fund, to follow the current Agreement.»
Seemingly forgotten by everyone but the Greek government (and a few pesky reporters), in November 2012 eurozone finance ministers agreed to grant Athens additional debt relief if the government achieved a primary budget surplus (meaning that it takes in more than it spends, when interest on debt is not counted). Well, Greece reached a primary surplus in 2013. And no debt relief has been agreed. Tsipras is asking for this to happen in the third bailout programme.
«Based on the in-principle acceptance of this letter and its content, the President of the Eurogroup convened the 20th February meeting which reached a unanimous decision expressed in a communiqué. The latter constitutes a new framework for the relationship between Greece, its partners, and its institutions.»
This may appear a rhetorical flourish, but it gets to something deeper that continues to plague the relationship: Tsipras regards the February 20 agreement as a break from what came before; other eurozone leaders, particularly in Germany, regard it as simply an extension of the existing bailout programme.
«More precisely, the 20th February Eurogroup agreement stipulated a number of points outlining this new framework and process, including:
(a) The Greek authorities will present a first list of reform measures, based on the current arrangement, by the end of Monday, February 23. The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review. This list will be further specified and then agreed with the institutions by the end of April.»
In order to win an extension, Varoufakis had to submit another letter (posted here) giving the eurogroup a list of broad reforms Athens intended to implement, since for weeks the Greek government had insisted it would not agree reforms that had been included in the existing bailout. The letter was intended to assuage those concerns before the eurogroup signed off on the extension. It succeeded, though the IMF and the ECB publicly voiced major concerns with the list.
«(b) The Greek authorities have expressed their strong commitment to a broader and deeper structural reform process aimed at durably improving growth and employment prospects, ensuring stability and resilience of the financial sector and enhancing social fairness. The authorities commit to implementing long overdue reforms to tackle corruption and tax evasion, and improving the efficiency of the public sector. In this context, the Greek authorities undertake to make best use of the continued provision of technical assistance.»
Tsipras has always insisted he’s in favour of reforms, and many of the reforms he cites are fully embraced by bailout lenders. But there are other reforms they want, too.
«c) We remain committed to provide adequate support to Greece until it has regained full market access as long as it honours its commitments within the legal framework.»
Self-explanatory. The eurozone will provide as much money as it takes, as long as Greece reforms.
«Based on this common ground, the Minister of Finance sent to the President of the Eurogroup a letter, dated 23rd February 2015, with the aforementioned “first list of reforms” [see (a) above] proposed by the government. On 24th February 2015 the said “first list” was accepted by the institutions as “sufficiently comprehensible to be a valid starting point for a successfully conclusion of the review” by 20th April 2015.
In order to expedite the process, the Ministry of Finance sent a letter to the President of the Eurogroup on 5th March 2015 urging that the process of technical discussions on specifying further the “first list of reforms” begin immediately. In the same letter the Minister of Finance attached seven examples of how the reforms in the “first list” could be developed and specified further.»
This is where things start to go off track. The Varoufakis letter referred to here (and posted here) is now known for its reference to a plan to deputise non-professionals – including tourists – as freelance tax inspectors. But the real problem with the letter is that it sent the process into what many in Brussels believed was the wrong direction. For them, the next step was for inspectors from Greece’s three bailout monitors to come to Athens and look at Greece’s books to see how far off track the programme had gone. But the new Varoufakis letter made clear Greece wanted to talk about something completely different – brand new reforms, not the ones in the existing programme.
«Following a positive reply by the President of the Eurogroup (dated 6th March 2015) and the subsequent Eurogroup meeting of 9th March 2015, the first round of discussions of the Brussels Group (comprising of the four institutions – EC-ECB-ESM-IMF – plus the technical team of the Greek government) took place, in Brussels, on Wednesday 11th March dealing with both political and technical issues. At that meeting it was also decided that technical teams of the institutions would travel to Athens on the following day for on-site fact-finding to assist the Brussels Group negotiations.»
Again, this paragraph demonstrates how far apart the two sides are in their understanding of what was supposed to happen over the course of the last month. Although Dijsselbleom did respond to the Varoufakis letter, it was more perfunctory than “positive” (a copy can be read here). And at the March 9 eurogroup Tsipras refers to, Dijsselbloem was downright angry at how long it had already taken to get inspectors to Athens. The “Brussels Group” is the new name given to the hated “troika” of bailout inspectors – the European Commission, ECB and IMF – which now includes a fourth institution, the eurozone’s €500bn bailout fund, known as the European Stability Mechanism.
«In the context of the above, I feel it is critical to alert you to a number of developments which are either undermining the spirit of the agreement reached or making their fulfilment perilously difficult.»
The preceding was prologue. This is what I’m really upset about.
«(a) On 4th February the European Central Bank lifted the waiver for minimum credit rating requirements for marketable instruments issued or guaranteed by the Hellenic Republic, while declaring that the waiver would be restored when an agreement was reached at the level of the Eurogroup. Moreover, even since the Greek banks were referred to the Bank of Greece’s ELA facility, the ECB has been raising the ELA’s ceiling at shorter intervals than normal and at rather small increments that incite speculation and spread uncertainty vis-à-vis Greece’s banking system. Additionally, the ECB determined that Greek banks cannot hold more T-bills than they did on 18th February 2015, thus restricting their participation to well below the T-bill cap. (Please note that, in the summer of 2012, when a new Athens government was in a similar situation to ours, ELA was being expanded generously, the T-bill issuance cap was lifted to allow the government to finance its debt repayments to our creditors, and banks were not restricted to any limit corresponding to a prior date’s holding. In that manner the government of the time and the Eurogroup were granted sufficient ‘space’ to reach an arrangement that allowed the Greek banks to move away from ELA and back to normal ECB financing methods.).»
This, in one place, is the entire bill of particulars that Tsipras has against the ECB. They are complicated, so let’s take them one by one. The first one – the reference to the waiver – is the same issue mentioned at the start of the letter.
When Greek banks were kicked out of the ECB’s normal emergency loan programme, they were forced to seek more expensive loans from the Greek central bank, which is known as ELA (for emergency liquidity assistance). Although the Greek central bank is the actual lender, the ECB must ultimately approve all ELA loans, and they’ve been keeping the Greek central bank on a very short leash, allowing only small increases periodically. Tsipras thinks that undermines confidence in the banking system, but the ECB thinks it’s just exercising its fiduciary duty.
Lastly, and possibly most importantly for Greece’s immediate cash crunch, is a ceiling on the amount of T-bills (short-term debt normally issued as three-month Treasury bills) that can be purchased by Greek banks. Because Greek banks are now relying on ELA for their day-to-day operations, the ECB has a say on what that money is spent on. And because EU law prevents central bank money to be used to fund national governments, the ECB has imposed a cap on the amount of Greek government T-bills Greek banks can buy. This is a big problem because, given the current uncertainty, almost nobody other than Greek banks are buying Greek T-bills. The ECB has told banks they’re not allowed to purchase any more T-bills than the amount they held on the day Greece requested its bailout extension, 18 February (this wasn’t previously known), which means that when their existing T-bills come due, they can buy an equal amount, but no more. Overall, the bailout programme allows Greece to issue €15bn in T-bills, but the limit on Greek banks means Athens is now apparently below the €15bn ceiling. Tsipras wants to be able to issue more T-bills, and have Greek banks purchase them.
The parenthetical refers to mid-2012, when Tsipras’ predecessor Antonis Samaras had just been elected and the ECB had far more lenient rules in place. The ECB argues that there is no double standard; Samaras was given leniency because he had promised to implement the existing bailout and started to do so. Tsipras, the central bank argues, repudiated the programme and has still not implemented its measures.
«(b) Following past failures (of the previous government) to complete the scheduled reviews, disbursements under the loan agreements with the ESM-EFSF were discontinued (while those of the IMF were similarly delayed), yielding a substantial financial gap in 2014 and 2015. This includes the profits from the ECB’s SMP-sourced bond redemptions, which the ECB distributes to member states on the understanding that they be passed onto the Greek government.»
The €7.2bn in the last bailout tranche which Tsipras is trying to get includes funding from three sources: €1.8bn from the eurozone’s bailout fund, €3.6bn from the IMF, and an additional €1.8bn in Greek bond profits. These bonds were purchased by the ECB in 2010 as a way to calm the financial markets, and it was decided in 2012 that it wasn’t proper for the ECB to make a profit on them – so the profits would be sent back to national governments, who would in turn pay them to Athens. The new Greek government has repeatedly insisted those profits are due to Athens now, and some officials have suggested they could be doled out as an early sub-tranche if Greek authorities implemented a series of reforms quickly. But most eurozone officials – including Merkel – have said they won’t be distributed until the entire bailout review is completed.
«Given that Greece has no access to money markets, and also in view of the ‘spikes’ in our debt repayment obligations during the Spring and Summer of 2015 (primarily to the IMF), it ought to be clear that the ECB’s special restrictions [see (a) above] when combined with the disbursement delays [see (b) above] would make it impossible for any government to service its debt obligations. Servicing these repayments through internal resources alone would, indeed, lead to a sharp deterioration in the already depressed Greek social economy – a prospect that I will not countenance.»
This is the heart of the matter. Tsipras is saying that unless he gets money fast, he only has two options: stop paying what it owes to creditors, including the IMF, or cut back sharply on social spending. And he will not countenance a cutback in social spending.
«Meanwhile, I also regret to report that little progress has been made in the negotiations between the technical teams in Brussels and Athens. The reason for the extremely slow progress is that the institutions’ technical teams, as well as some of the actors at a higher level, seem to show little regard for the 20th February Eurogroup agreement and are, instead, committed to proceeding along the lines of the Memorandum of Understanding that pre-dates both the 20th February agreement and 25th January 2015 – the date on which the Greek people elected a new government with a mandate to negotiating the new process established by the 20th February Eurogroup agreement. It is difficult to believe that our partners consider that a successful reform drive can be carried out under such restrictive and pressing constraints, including the financial squeeze that my government is currently labouring under.»
This very succinctly describes the standoff. Tsipras thinks the bailout has changed, and the rest of the eurozone doesn’t. Among the things that comes with the old style of doing business is intrusive inspections by bailout monitors in Athens, and the Greek government until last week was not willing to accept those, since it reminded Greek voters of the reviled “troika.»
«The Greek government remains steadfast in its commitment to fulfil its obligations to its partners within the framework of the 18th February letter and 20th February Eurogroup decision. However, I am also obliged to make clear to you that, in order to continue to fulfil our obligations, as we have done up to now, progress has to be made on a number of fronts:»
Here come the demands.
«(a) After 20th February Eurogroup agreement and the approval of the extension of the MFAFA by member states, and given that the technical discussions with the institutions are under way, the ECB should return the terms of finance of the Greek banks to their pre-4th February 2015 state.»
In short, the ECB should start accepting Greek bonds as collateral again.
«(b) The process by which the reforms proposed by the Greek government, and their evaluation, must be immediately clarified so as to make a successful conclusion of the review by the end of April 2015, as well as to specify the recommencement of disbursements with the progress of the negotiations.»
Are you really going to force me to accept troika inspections again to get this thing done? And when are you going to start giving us the sub-tranches you talked about?
«(c) The process must be specified (as well as the participants and timetable) by which further arrangements (which my government would like to take the form of a ‘Contract for Greece’s Recovery and Development’ – including provisions on Greece’s public debt in the spirit of the November 2012 Eurogroup agreement) will be agreed to before the end of June 2015.»
We need to start talks on a third Greek bailout, including some debt relief. But instead of calling it a third bailout, we’d like to call it “Contract for Greece’s Recovery and Development''.
«In conclusion, Greece is committed to fulfilling its obligations in good faith and close cooperation with its partners. To this purpose we are committed fully to the process specified in the 20th Eurogroup agreement so as to begin immediately the work of implementing reforms crucial to our economy’s prospects of long term development within an inclusive Europe. With this letter, I am urging you not to allow a small cash flow issue, and a certain ‘institutional inertia’, to not turn into a large problem for Greece and for Europe.»
Alexis Tsipras
This isn’t going to get any easier for either of us.
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