* Certo che passerà, tutto è in discussione", ha detto il ministro dell'Economia, Giorgos Stathakis, uscente del consiglio di governo, che è stato completato, ha chiesto se la proposta greca avrebbe "passare" da SYRIZA in Parlamento.
This afternoon, German Finance Minister Schauble has been quoted stating that European Treaties make the granting of face value haircuts impossible, while the scope for further reductions in interest rates on Greek debt and maturity extensions is “limited”. The first statement depends on how one interprets European Treaties, but in our view, is broadly correct. The second statement is far more questionable and, in our view, lies more in the politics of the situation than any clear legal constraint.
Article 125 of the European Treaty (reproduced below) may appear innocuous on first read, but this “no-bail-out clause” remains in the Treaty even as the ESM was created. The European Court of Justice argued that the ESM was consistent with the no-bail-out clause on a number of grounds, but a key section from their judgement on the issue runs as follows
“The ESM Treaty in no way implies that the ESM will assume the debts of the recipient Member State. On the contrary, such assistance amounts to the creation of a new debt, owed to the ESM by that recipient Member State, which remains responsible for its commitments to its creditors in respect of its existing debts. It should be observed in that regard that, under Article 13(6) of the ESM Treaty, any financial assistance granted on the basis of Articles 14 to 16 thereof must be repaid to the ESM by the recipient Member State and that, under Article 20(1) thereof, the amount to be repaid is to include an appropriate margin”.
So any financial assistance from the ESM “must be repaid to the ESM by the recipient Member State”. It is hard to square that statement with any face value reductions in loans from the ESM. By extension, it is difficult to argue that loans from the EFSF or the Greek Loan Facility (the forerunners to the ESM) could be given a face value reduction, as the existence of those mechanisms can only be claimed to be consistent with the TFEU as on the same grounds as the ESM.
But this says nothing about when the debt has to be repaid, or exactly what constitutes “an appropriate margin”. In the presence of other measures to mitigate moral hazard and ensure budgetary stability, and enormous budgetary difficulties in the member state concerned, one could probably argue that there are circumstances when an interest rate of zero would constitute “an appropriate margin”. And as we have seen already, there is nothing to stop the region extending the maturities on the loans to Greece (and others) into the future, as has already occurred.
When Schauble states that the room for further restructuring of debt is limited, he probably has in mind that the interest cost on the majority (but not all) of Greece’s debt to its European creditors has been reduced to near its funding cost, while maturities have already been extended. But it is not clear to us that there is a legal, as opposed to political, bar to reducing interest rates to below funding cost. To the extent that some countries balk at the implied transfer to Greece, we note the region has plenty of mechanisms to offer a political side-deal. And if the maturity of a loan can be extended once, there is nothing to suggest it cannot be extended again.
The bottom line in our view is that even if face value haircuts are barred at this point, Greek debt sustainability can be assured by repeated maturity extension and interest rate reductions if there is a political will to do so. Moreover, the fact that the Treaty current disbars face value reduction does not mean that it will necessary do so after the next set of Treaty revisions (whenever they occur). This point appears to be somewhat lost on those who insist that their debt sustainability spreadsheet should show the debt GDP ratio falling to some arbitrary level given the current configuration of the debt and whatever assumptions they make about growth and fiscal variables extending a long way into the future.
The European approach to debt sustainability can be best summarised not in a spreadsheet, but in the following statement: “trust us, and we will work it out through time”. For those who argue that such an approach is not enough to allow Greece to retain market access, we would remind them that Greece was able to issue €3bn in 5-year bonds in April 2014, when the IMF’s debt sustainability analysis was frankly only a little more convincing than it is now. And we would pose a final question. Let’s imagine that rather than facing significant amortizations to the IMF and ECB this year, that debt had been purchased by the ESM and maturities extended well into the future. Freed of any constraint to repay official sector creditors in the near term, and hence the need to negotiate with them, what sorts of policies would the Syriza-led administration have pursued? One may reply that is Greece’s democratic right to choose its own path. But in a monetary union, everyone’s actions have plenty of potential to impact the others, and the region is struggling to develop a governance regime that accommodates that. Hence, the loans from the region come with significant strings attached.
Article 125, TFEU
1. The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.
* Riunione congiunta del gruppo parlamentare di Syriza e della segreteria politica avrà luogo Venerdì mattina alle ore 08.00, per l'adozione della proposta presentata dal governo greco ai partner, con l'obiettivo di raggiungere un accordo, secondo Atene News Agency.