Greece needs a debt restructuring


On Wednesday, the Greek Parliament approved the sweeping economic reforms, demanded by the its creditors, and paved the way for talks on a third bail-out for the country. The parliamentary vote marked a “serious division” among its lawmakers, which forced the Government to rely on the support of three pro-European opposition parties.

But Greece’s efforts to implement tough reforms have been “rewarded” as Europe started to restore funding.

The ECB increased the cap on emergency funding for Greek lenders by 900 million euros in order to allow banks to reopen on Monday. In addition, on Thursday, creditors agreed to give the country a €7billion financing accord, which is expected to be extended to Greece from the European Financial Stability Mechanism and that would enable Athens to avoid defaulting on the €3.5 billion payment to the European Central Bank that expires on Monday 20 July.

Things have changed now,” said the ECB President Mario Draghi. “We had a series of news with the approval of the bridge financing package, with the votes, various votes in various parliaments, which have now restored the conditions for a raise in ELA.” Nevertheless, as the ECB’s President, Mario Draghi stated, the Central Bank’s support would not be open-ended and restrictions on withdrawals would only be lifted gradually.

While these lifelines have opened talks for the third bailout, rescue measures have not removed the risk of a Greek exit from the Eurozone as long as the Greek debt gets back to a sustainable path.

The debt relief still remains the most controversial issue over the Greek bailout. During the negotiations, Athens has firmly asked for writing down the country’s debt that now exceeds 300 billion euros. Nevertheless, its stance encountered the standoff of Germany and other Eurozone creditors, which have been reluctant to provide a debt relief that they could hardly sell to their voters.

Backing Greece on this issue, the International Monetary Fund (IMF) has recently issued a preliminary revision to Greece’s debt sustainability which stated that Athens needed not only far-reaching reforms but also debt forgiveness. Thus, the only alternatives envisaged by the IMF would be for the European creditors to write off part of the Greek debt or to make no payments for at least 30 years.

Surely, in setting the conditions that Greece needs to meet in order to receive the third bailout, the Eurozone creditors have recognized that it could be necessary for Athens to be given some relief in paying off its debt. Nonetheless, the document issued on Monday by the Eurozone leaders, outlining the tentative bailout agreement, makes unequivocally clear that no write-down of the debt, or a haircut, would be considered.  Officials say they would consider debt maturity extensions and rate reductions if Greece delivered on promised economic overhauls and budget cuts.

Now, the point is how find the best form of debt relief within the European legal institutional framework.

Berlin insists that the ECB cannot accept any debt restructuring without violating its charter. Thus, while approving the new bailout, the German Ministry of Finance, Schauble, continues to argue that a Greek timeout from the Eurozone membership could the best path for Greece to deal with its financial needs. Similar positions has been expressed by some other Eurozone countries that are reconsidering the temporary exit of Athens from the common currency, arguing that Greece could be recover faster outside the Eurozone.

Nevertheless the Eurozone leaders, which agreed in principle to the bailout package, need the involvement of the IMF as a precondition for the Greece’s rescue, both to lend the program more credibility and to cover the country’s estimated €85 billion ($93.5 billion) cash needs over the next three years. Nevertheless, the IMF insisted that no solution is possible or effective without debt restructuring, though a haircut is not currently on the table.

Thus, the Washington-based fund will participate in the Greek bailout plan only if it includes a concrete commitment “on a scale that goes well beyond what has been under consideration to date and what has been proposed by the Eurozone authorities.”  Indeed, fund rules prohibit the IMF from lending to countries without sustainable debt profiles. Thus, the Eurozone’s failure to provide a stronger commitment on restructuring could jeopardize the proposed bailout as it may imperil the emergency-lender’s involvement in the program.

In the meantime, as Greek financial needs rapidly growing, uncertainty over the deal creates only additional strains on the Eurozone, which its unity has been already shaken.


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