IMF v Germany: Eurogroup keeps the fight under control

Main actors of yesterday’s Eurogroup. (left to right) Wolfgang Schauble, German Federal Minister for Finance, Jeroen Dijsselbloem, President of the Eurogroup and Dutch minister of Finance, Olli Rehn, Vice President of the European Commission, Luis De Guindos Jurado, Spanish Minister for Economic Affairs and Competitiveness. (Council of the European Union photographic library, 20/6/2013)

As it usually happens in the European Union, a much debated and infested with conflicting interests major issue, like the bank recapitalisation, will not be decided upon in one go but it will remain open for as much time as needed to mitigate differences. Yesterday evening the Eurogroup meeting, which usually precedes the Ecofin Council gathering, gave credit to this traditional and unwritten EU rule.

The Brussels Commission said was feeling happy with Eurogroup’s endorsement of the direct bank recapitalisation from the European Stability Mechanism with retroactive enforcement. At the same time Berlin clearly stated that it gives false impressions maintaining that the bank recapitalisations issue is settled. Facts seem to support Berlin’s reading of what happened yesterday. Let’s take one thing at a time.

Debt sustainability

Everything started some weeks ago when it became clear that the major Eurozone central banks and the ECB, which have acquired a large part of the Greek debt, refused to extend the maturities of the bonds they hold by buying new debt paper when the ones they got come to maturity. They said that such a swap may be taken as a direct subsidy to Athens, an aid action forbidden by their status. The Eurozone however in cooperation with the IMF agreed last December to a path for the Greek debt keeping it sustainable, so as the Fund can continue contributing to the country’s rescue programme. This agreement contained a long extension of maturities of the Greek bonds held by Eurozone’s central banks.

Now the IMF says the denial of the central banks to comply with this obligation creates a credit gap in Greece’s financing of the order of €4.5 billion in 2014. This makes the country’s debt unsustainable and prohibits the Fund from continuing its participation in the country’s rescue programme. Understandably the German central bank, the Bundesbank, is behind Eurozone central bank reluctance to extend the Greek debt maturities. Already the German minister of Finance Wolfgang Schaeuble expressed openly his worries over IMF’s demands by saying, “we Europeans must regulate our own affairs ourselves and terminate IMF’s presence in Eurozone”.

At this point it must be noted that the ESM funds having already been used to recapitalise the ailing Greek, Spanish, Irish and Portuguese banks are also charged to the relevant sovereigns thus increasing the public debt. In the case of Greece this arrangement makes the country’s debt barely sustainable. The four Greek commercial systemic banks have received capital injections from the ESB of €48.5bn. This amount has inflated the public debt bringing it at the limits of the country’s ability to serve it.

Central banks v IMF

Now add to that the denial of the major Eurozone central banks to extend the maturities of the Greek bonds they hold and the overall public debt of the country becomes overly non sustainable, forcing the IMF to step out. Brussels however, for an array of major and minor reasons, don’t like that at all. In view of this dead-end Commissioner Ollie Rehn and the President of Eurogroup and Dutch minister of Finance, Jeroen Dijsselbloem, both asked yesterday and the Eurogroup decided the direct recapitalisation of Eurozone’s ailing banks by the ESM with retroactive enforcement.

In this way the funds that have already been used for this purpose and have been also charged to the relevant sovereigns, increasing considerably the public debt, would now theoretically be subtracted from the public debt making it again sustainable and thus covering IMF’s objections about debt sustainability. At the same time however the Eurogroup, at a request obviously by Germany, set a backstop to the ESM funds that can be used to this purpose at €60bn. This amount however is quite inadequate given that only the Greek banks recapitalisation amounted, as stated above, at €48.5bn.

As things stand now the introductory comment of this article is quite justified. The Commission’s request, in order to keep the IMF in Europe was partly satisfied by Eurogroup. At the same time though the Eurozone ministers of Finance followed also Berlin’s request by setting this €60bn backstop on EMS funds use. In this way no side is totally happy. In any case the arrangement seems to permit the disbursement of the next instalment of soft loans to Greece of €8.5bn. This will cover the country financial until the end of the year. As for 2014 it’s rather certain that the Eurogroup will think of something to keep everybody…semi-happy.

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