Eurogroup asked to reduce public debts of its member states

Jeroen Dijsselbloem, Dutch Minister for Finance and President of the Eurogroup (on the left) received in The Hague, Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro. (EC Audiovisual library, 11/06/2013 ).

Jeroen Dijsselbloem, Dutch Minister for Finance and President of the Eurogroup (on the left) received in The Hague, Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro. (EC Audiovisual library, 11/06/2013 ).

Eurogroup President and minister for Finance of Holland, Jeroen Dijsselbloem, in an unexpected move this week sent his peers a letter to invite them to their 20 June meeting in Luxembourg, asking them to think about taking a decision on a possible  recapitalisation of Eurozone banks directly from the European Stability Mechanism, with retroactive enforcement.

This will be a great alleviation for Ireland, Greece, Spain and Cyprus, the major commercial banks of which have been recapitalised with tens of billions of ESM money that was also charged to sovereigns. Consequently the recapitalisation of banks presently adds to public debt. Dijsselbloem’s proposal will greatly reduce the official obligations of those countries, charging directly the private banks.

For example in the case of Greece, the four systemic banks of the country have been recapitalised by the ESM with €48.5 billion, but this amount has been charged also to the sovereign, inflating the public debt by up to 15-16% of GDP. If the Eurogroup agrees to a retroactive direct bank recapitalisation from the ESM, without the intermediation of Greece’s sovereign, the country’s public debt will be at once reduced by an equal amount.

Promised debt reduction

In this letter Dijsselbloem says also that this has to be done before summer and reminds his fellow ministers that the Eurogroup has promised Athens to reduce the country’s debt to sustainable levels at 120% of the GDP by the spring of 2014. At this point it must be reminded that while putting together the present second aid programme to Greece the IMF had demanded and the Eurogroup had accepted, to reduce the country’s sovereign debt to the sustainable levels of 120%-122% of the GDP during the first half of 2014.

Why now?

This bold move by the President of the Eurogroup was not quite unexpected though. Dijsselbloem was recently in Athens for a working visit. While there, in more than one occasion he left to be understood that he will work towards the promised reduction of the country’s sovereign debt. He also mentioned the possibility of a retroactive enforcement of a possible decision on direct recapitalisations of banks by the ESM. At that time those two possibilities sounded like a lip service to his hosts in the Greek capital, but obviously they were not. Eurogroup members don’t take those things lightly let alone the President.

Sustainability of obligations

As a result Greece expects one more reduction of its debts next year, if it honours its side of the programme. Dijsselbloem had reminded everybody of this possibility while in Athens. This second reduction was promised by the Europeans to the IMF as mentioned above, in order the Fund to continue participating in the troika of EC-ECB-IMF, which has undertaken the drafting and the implementation of the current second rescue programme for Greece. The IMF is bound by its statutes not to help countries with unsustainable sovereign debt and to this effect the Eurogroup has undertaken the obligation to reduce the Greek debt to sustainable levels.

Now in order to reduce the Greek debt from its present levels of 160% to sustainability, the official lenders of this country have to make important concessions. The character of those concessions is presently under negotiation. The IMF insists on cuts of the principal rather than interest rate and other peripheral cost reductions as Germany wants. The amounts in question are not small and Berlin will probably find it unavoidable for the first time to really burden the German taxpayer. Until today Berlin has offered its help to rescue the over indebted Eurozone countries always with a gain. The time has come now for the pain.

That is why today Germany wants the IMF out of Europe. Three years ago Berlin demanded the Fund’s participation in the European countries’ rescues, counting then on the Fund’s contribution to the cost. As it turned out the IMF was lending money to the Europeans at 3%, while Germany wanted at least 5%.

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