Greece: Scraping for Funds

Published on March 24, 2015

If yesterday’s high profile, cool but cordial, summit between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras was intended to dial down recent heated exchanges between Athens and Berlin, it may not last for very long. Greek officials today have requested that the EU return 1.2 Billion Euros held by the European Financial Stability Fund they claim is rightly theirs, and the proposal is quickly running into resistance in EU policy circles.

In response, as Athens scrambles to meet a looming cash financing crunch, Eurogroup President Jeroen Dijsselbloem today tasked the Euro-Working Group led by President Thomas Weiser to study that request in coordination with the EFSF and to respond to Athens by tomorrow.

*** We suspect disbursement of those funds as envisioned by Athens — that is to say, free and clear to be used to plug budget shortfalls — is unlikely. ***

*** From what we understand from EU officials, once the funds were returned, to lend them back out is effectively a new disbursement and the political and legal limitations governing the use of EFSF funds restrict their disbursement specifically for bank recapitalization purposes; in other words, EFSF funds are not and will not be fungible to be used for government financing purposes. ***

*** A compromise is possible, though a tricky one, in that the EFSF funds could be released for use by Athens if earmarked for its original intent, as a safeguard against bank runs, and not to plug a hole in the government’s operating budget or debt payment schedule. But more to the point, while the EU will keep the negotiating door open to relief, it is unlikely to do so until it sees from Athens “comparable” commitment to budgetary sustainability and reform. ***

Cash Used Instead of EFSF Funds

Athens is claiming the 1.2 billion euros as its own on the basis that it drew on that amount of cash out of its own government coffers to recapitalize banks rather than draw on the loans provided by the EU, through the EFSF, to the Hellenic Financial Stability Fund. They now argue the 1.2 billion euro portion of the 10.9 billion Euros of unused funds Greece’s HFSF was required to return back to the EFSF as a condition of the February 20 agreement with the EU should now be reversed.

Even agreeing to a compromise deal returning those funds but with limitations in place on their usage however may be tricky.

Greece formally signed off on returning the funds to the EFSF, and so now sending those funds back to Athens will be a decision treated essentially as a “new” disbursement requiring unanimity from the EFSF board. And the fact that Athens voluntarily chose to use some of its own funds rather than HFSF money at the time to earn a return on money that was earning zero interest is not lost on officials.

More to the heart of the matter, after struggling for almost two months to force the bombastic Tsipras government to finally move beyond grandstanding and focus on the urgent need for providing a credible budget to the EU by this weekend if a “Graccident” is to be avoided, there may be little enthusiasm on a political level to pre-emptively release the EFSF funds back to Greece even before Athens finally delivers on its pledges.

That is not to deny discussions between the EU and Greece are now, finally, on a more constructive path.

With all sides committed and focused on reinforcing an atmosphere of mutual cooperation and understanding, we do expect the EU to hold open the prospect for some relief. But we expect that to remain contingent upon Athens delivering a program that, even if not adhering strictly to the previous memorandum, contains provisions that can be evaluated and deemed to show “comparable” commitments to budgetary sustainability and reform.

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