July 13, 2015

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Greece Reaches Agreement Following Marathon Eurozone Summit - Gov't has to rush to push prerequisites by Wednesday

The marathon Summit on Greece, which began at 17:00 on Sunday, and ended Monday morning, finally concluded with a unanimous agreement. Announcing the news, President of the European Council Donald Tusk said in a tweet that a unanimous agreement was reached over an ESM program for Greece, in exchange for serious reforms. Cyprus' Nikos Christoulides, on the other hand tweeted that it "seems we have a deal", adding that "Europe deserves some good news".

A little after the Summit began on Sunday afternoon, a break was called at 19:00 for a fourth meeting between Greek Prime Miniser Alexis Tsipras, German Chancellor Angela Merkel, French President Francois Hollande and European Council President Donald Tusk. As announced, the IMF’s involvement in the new program is also locked, and the idea of the 50-billion-euro fund based is not going to be based in Luxembourg as first announced on Sunday, and will instead be based in Athens.

Tsipras has to now accept a series of prerequisites and enact them by Wednesday, in order to resume negotiations for the third bailout program. When the Greek parliament passes the measures, then there will be no need for a new European Summit on Wednesday, since the Eurogroup will authorize the resumption of negotiations.

Following the announcement of the agreement, Eurogroup chief Dijsselbloem underlined that the privatisation fund that is going to manage 50 bln in assets, is going to be based in Greece and headed by experts.
     "Trust was a very key issue, we looked at reforms, debts, financials needs. We were able to agree on all these issues to get Greece back on track. The Greek parliament will legislate very quickly on a number issues, which will help bring back trust to member states. There is agreement that Greek reforms need to be strengthened sooner. Assets will be transferred to a fund to be set up. The fund will monetise them by privatisation or running them. It will be used to help recapitalise banks. Once the 25 billion Euros needed for recapitalisation is repaid, the remaining funds will be used to bring down debt by 50% and the other 50% for the Greek government to reinvest into Greece."
The good news is that the state news agency in Greece (ANA-MPA) said that the prospect of a "Grexit" has finally appeared to be off the table and that the conditions for the financial support of Greece in the short and mid term were gradually maturing.

Here are the measures that have to be enacted by Wednesday by the Greek government in order to "rebuild trust" with Europe. Reuters published part of these measures, noting that changes should be expected.

Greek authorities must introduce the following measures:
  • streamline the VAT system and broaden the tax base to increase revenue;
  • introduce upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform program;
  • adopt a 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;
  • safeguard the full legal independence of ELSTAT;
  • fully implement the relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, in particular by making the Fiscal Council 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;
  • transposition the BRRD at the latest within a week with support from the European Commission.
Additionally, the Eurogroup noted that Greek authorities need to “to formally commit to strengthening their proposals in a number of areas identified by the institutions, with a satisfactory clear timetable for legislation and implementation, including structural benchmarks, milestones and quantitative benchmarks, to have clarity on the direction of policies over the medium-run”.

As such, Greece must
  • carry out ambitious pension reforms and specify policies to fully compensate for the fiscal impact of the Constitutional Court ruling on the 2012 pension reform and to implement the zero deficit clause or mutually agreeable alternative measures by October 2015;
  • adopt more ambitious product market reforms with a clear timetable for implementation of all OECD toolkit I recommendations, including Sunday trade, sales periods, pharmacy ownership, milk, bakeries, [over-the-counter pharmaceutical products in a next step], as well as for the opening of macro-critical closed professions (e.g. ferry transportation). On the follow-up of the OECD toolkit-II, manufacturing needs to be included in the prior action;
  • on energy markets, proceed with the privatisation of the electricity transmission network operator (ADMIE)[, unless replacement measures can be found that have equivalent effect on competition, as agreed by the institutions];
  • on labour markets, undertake rigorous reviews of collective bargaining, industrial action and collective dismissals in line with the timetable and the approach agreed with the institutions. [In addition, the Greek authorities shall modernize the legislative framework for collective dismissals, in line with best practice]. On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth;
  • adopt the necessary steps to strengthen the financial sector, including decisive action on non-performing loans and measures to strengthen governance of the HFSF and the banks, in particular by eliminating any possibility for political interference especially in appointment processes.
On top of that, Greek authorities are called to develop a significantly scaled up privatization program with improved governance. This controversially means that Greek authorities called to invite an independent body to assess the price of assets sold and investigate the best way to further increase the independence of TAIPED with the involvement of the European Commission. Alternatively, valuable Greek assets to the tune of 50 billion euros will be transferred to an existing external and independent fund, to be privatized over time and decrease debt. Such fund would be managed by the Greek authorities under the supervision of the relevant European institutions.

According to the Eurogroup draft Greece’s financing needs are estimated to be between 82 and 86 billion euros.

Under this proposal Greece will receive 7 billion by 20th of July and further 5 billon euros by mid August. Greek banks would gain a 10-to-25 billion euro buffer, “in order to address potential bank recapitalization needs and resolution costs, of which EUR 10bn would be made available immediately in a segregated account at the ESM”.

While there is a possibility of debt re profiling, the Eurogroup draft explicitly stresses that “[nominal] haircuts on the debt cannot be undertaken”. Finally, the draft notes that should no agreement be reached, then “Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring”.

References: To Vima, Reuters, SKAI TV Greece, ERT Tv Greece, BBC, ANA-MPA, Kathimerini, Enikos, ProtoThema
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