There are three sets of short-term measures:
- smoothing Greece’s repayment profile;
- reducing interest rate risk;
- waiving the step-up interest rate margin for 2017
|Programme 1||Programme 2||Programme 3|
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New government announces major policy shift, halting previous reform agenda
ESM Board of Governors approves ESM programme for Greece ESM makes first loan disbursement of €13 bn to Greece
A third assistance programme for Greece
The euro area is making an unprecedented effort to put the Greek economy back on track. The loan packages from the ESM and EFSF are by far the largest the world has ever seen. The two institutions own half of Greece’s debt. The vast and deeply rooted problems in Greece mean the programmes have lasted much longer than those of other crisis-hit countries. The loans, at very low interest rates with long maturities, are giving Greece fiscal breathing space to bring its public finances in order. And because of the ESM’s cash-for-reform approach, Greece is making impressive progress in modernising its economy.
Greece has received two thirds of the total funds disbursed by the ESM and the EFSF. The money is lent under strict conditions. Athens must implement a host of tough reform measures. It must fix its banking system, ensure sound public finances, and liberalise markets. Creditors are closely monitoring progress in achieving these measures. They only disburse money when Greece takes the steps it has promised.
In the middle of 2015, Athens entered a new ESM programme of up to €86 billion. It was the third programme for the country. The decision sparked fierce public debate across Europe. In part this was due to the acrimonious negotiations preceding the decision.
ESM loans help make Greece’s debt sustainable
The structural reform programme Greece has committed to will galvanise economic growth. Moreover, the EFSF and ESM loans lead to substantially lower financing costs for the country. That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment. Greece will not have to start repaying its loans to the ESM before 2034, for instance.
These lower costs are passed on to Greece, which helps to make its debt more sustainable. Many people say that Greece’s debt level is too high. They point to the debt-to-GDP ratio, which stands at more than 180%. But this overlooks the ESM’s favourable lending conditions, which feature low financing costs and long repayment periods.
Why three programmes?
By the start of 2010, investors would no longer lend money to Greece. Private investors did not believe that they would get their money back. Athens had to ask for help. It was an unprecedented event. The EU had not foreseen a possible default of a euro area member. There were no European institutions to deal with such a crisis. Markets were speculating that the euro area could break up.
To help Greece finance itself, euro area countries lent Greece €52.9 billion on a bilateral basis. The IMF also provided money. In 2012, this turned out not to be enough. By then, the EFSF had been established. It provided the bulk of a second programme, in which a total of €141.8 billion was disbursed, again with a contribution from the IMF. Banks and other investors contributed by writing down part of the value of their debt holdings, in the so-called Private Sector Involvement (PSI) programme.
In 2014, the effects started to show. The Greek economy returned to growth, and unemployment began to drop. Athens was even able to raise money in markets again. In January of the following year, a snap election brought a new government to power. The reform programme was suspended and Greece fell back into recession.
The new government could not come to terms with creditors about the reforms the previous government had promised. The assistance programme was extended twice in the first half of 2015 but finally expired in June 2015. The country ran out of money and missed debt payments to the IMF. In order to stop a bank run, it had to limit the amount of cash people could take out of their bank accounts. The Athens stock exchange was closed. A new third programme was only agreed to at the last minute in August 2015, after two further months of negotiations.
The cause of Greece’s problems
The Greek economy had always been relatively closed, and controlled by vested interests. When the country joined the euro in 2001, it was suddenly able to borrow money at a far lower rate than previously. As a result, the government boosted spending. At the same time, revenues weakened, in part because of a poor tax administration. Public debt soared quickly. Wages rose too fast and the country became too expensive to compete internationally. In the past, this would have caused the drachma to devalue against other currencies. In the euro area, that option no longer existed. The result was a contracting economy and unemployment rising to alarming levels.
(max. total committed: €86 billion; availability period ends on 20 August 2018)
|Date of disbursement||Amount disbursed||Type of disbursement||Maturity||Cumulative amount disbursed|
|20/08/2015||€13 billion||Cash||Amortisation from 2034 to 2057||€13 billion|
|24/11/2015||€2 billion||Cash||Amortisation from 2034 to 2057||€15 billion|
|01/12/2015||€2.7 billion||Cashless||Amortisation from 2055 to 2059||€17.7 billion|
|08/12/2015||€2.7 billion||Cashless||€20.4 billion|
|23/12/2015||€1 billion||Cash||Amortisation from 2034 to 2057||€21.4 billion|
|21/06/2016||€7.5 billion||Cash||Amortisation from 2034 to 2058||€28.9 billion|
|26/10/2016||€2.8 billion||Cash||Amortisation from 2034 to 2058||€31.7 billion|
|10/07/2017||€7.7 billion||Cash||Amortisation from 2034 to 2059||€39.4 billion|
|30/10/2017||€0.8 billion||Cash||Amortisation from 2034 to 2059||€40.2 billion|
|28/03/2018||€5.7 billion||Cash||Amortisation from 2051 to 2054; 2060||€45.9 billion|
|15/06/2018||€1 billion||Cash||Amortisation from 2034 to 2060||€46.9 billion|
Weighted average maturity of loans: 31.7 years (after repayment of €2 bn)
1 The ESM issued floating rate notes for the purposes of funding bank recapitalisation/resolution. Notes amounting to €5.4 billion were disbursed to Greece; the remaining €4.6 billion was not used and the notes were subsequently cancelled. The amount was disbursed pro rata in ESM floating rate notes listed above.
|Date of repayment||Amount repaid||Details|
|20/02/2017||€2 billion||Contractual obligation following sale of assets of recapitalised NBG bank|
Euro area Member States provided the first financial assistance package to Greece, supplying €52.9 billion in bilateral loans under the Greek Loan Facility. EFSF financial assistance, part of the second programme, ran from March 2012 through June 2015. In this programme, the EFSF disbursed a total of €141.8 billion, of which €130.9 is outstanding.
There are three sets of short-term measures:
The smoothing of the repayment profile refers to Greece’s second programme, with the EFSF. The maximum weighted average maturity of the loans in this programme was agreed to be 32.5 years. Due to several factors, such as the return of bonds by Greece to the EFSF in February 2015, it dropped to approximately 28 years. The maturity has now been brought back up to the maximum of 32.5 years, and the repayment scheduled re-profiled, to avoid a number of repayment humps in the 2030s and 2040s.
There are three different schemes for the second measure.
The first is a bond exchange. To recapitalise banks, the EFSF/ESM provided loans to Greece worth a total of €42.7 billion. These loans were not disbursed in cash, but in the form of floating-rate notes. Greece used the notes to recapitalise banks.
The ESM is now exchanging these bonds for fixed-rate notes, which it is then buying back for cash. This significantly reduces the interest rate risk that Greece bears. The ESM has raised all the funds that are needed for the bond exchange through issuing longer-dated bonds.
The second scheme foresees the ESM entering into swap arrangements. This scheme aims at stabilising the ESM’s overall cost of funding and reducing the risk that Greece would have to pay a higher interest rate on its loans when market rates start rising.
A swap is a financial contract that enables two counterparties to exchange the cash flow on two different securities, for instance, fixed-rate payments for floating-rate payments.
The ESM has now put the swap programme in place, and will continue to be active in the derivatives markets to maintain it.
The third scheme, known as matched funding, foresees the ESM charging a fixed rate on part of future disbursements to Greece. This would entail issuing long-term bonds that closely match the maturity of the Greek loans. This scheme will be implemented in 2018.
Market conditions may influence the degree to which the ESM can implement any of these three schemes.
The waiver of the step-up interest rate margin applies to the €11.3 billion instalment of the EFSF programme (second programme) used to finance a debt buy-back. A margin of 2% had originally been foreseen for 2017 onwards. This margin was waived, and has not been charged for the year 2017.
The measures seek to address a general concern that future debt payments will pose an undue burden on budget spending and thus stifle the economy. Gross Financing Needs (GFN), the total amount of money a country spends in one year on interest rates payments and repaying maturing debt, is the benchmark used to measure this burden. The Eurogroup has agreed that, under a baseline economic scenario, Greece’s GFN should remain below 15% of GDP during the post-programme period for the medium term, and below 20% of GDP after that.
The funding strategy remains unchanged. The ESM and EFSF will remain present as an issuer in benchmark sizes along the entire yield curve.
For internal purposes, the ESM has created a portfolio that will contain the proceeds of all the operations required to fund the short-term measures, known as the ‘Greek Compartment’. This will enable us to isolate these costs, and pass them on directly to Greece, so that other beneficiary countries don’t bear any extra cost.
The scheme is expected to be neutral for Greek banks and needed their consent for implementation.
No. The Eurogroup set as a condition that the transactions would not have any direct cost for other programme countries.
The adjusted repayment profile is expected to bear no cost. The cost of the waiver of the step-up margin will consist of the foregone profit for the EFSF and its shareholders.
Any costs from the three schemes to reduce the interest rate risk will be borne by Greece. This is particularly the case for the bond exchange and the interest rate swaps. Such short-term costs are more than compensated by the long-term benefits of the operation for Greece.
When implemented in full, these measures should lead to a cumulative reduction of Greece’s debt-to-GDP ratio of around 25 percentage points until 2060, according to ESM estimates in a baseline scenario. It is also expected that Greece’s gross financing needs will fall by around six percentage points over the same time horizon. The bond exchange and the interest rate swaps make up the largest part of this reduction. Second-round effects on Greece’s refinancing rates would be an additional benefit. The short-term measures will improve Greece’s debt sustainability.
However, caution is warranted. The impact of some of the measures hinges on several factors beyond the ESM’s control. These include the interest rate environment and the availability of other market participants to conclude some transactions.
The Eurogroup laid down guiding principles for additional debt relief in its statement of May 2016. It excluded any nominal haircuts, and further decided that the measures must: facilitate market access for Greece to replace publicly financed debt with privately financed debt; smooth the repayment profile; incentivise the country’s adjustment process (even after the ESM programme ends); and ensure flexibility to accommodate uncertain economic growth and interest rate developments in the future.
In its statement of 25 May 2016, the Eurogroup also mentioned a possible second set of measures, if needed, following the successful implementation of the third programme by Greece. These are called medium-term measures. For the long term, the Eurogroup has agreed to a contingency mechanism to ensure long-run debt sustainability in case a more adverse economic scenario materialises in the country.
In its statement of 25 May 2016, the Eurogroup mandated the ESM to work on a first set of debt relief measures, referred to as short-term measures.
The ministers said that these measures would be implemented after the closure of the first review and before the end of the current ESM programme (the third programme). On 5 December 2016, the ESM presented detailed plans for the short-term measures to the Eurogroup.
On January 23, the governing bodies of the ESM and of the EFSF completed the approval process of the measures. The measures were successfully implemented over the course of 2017.
The Greek Loan Facility is the first financial support programme for Greece, agreed in May 2010. It consisted of bilateral loans from euro area countries, amounting to €52.9 billion, and a €20.1 billion loan from the IMF. The EFSF, which was only established in June 2010, did not take part in this programme.
Thanks to the debt relief measures approved by the Eurogroup, the Greek government saved an equivalent of 49% of its 2013 GDP. This includes savings of 34% of GDP thanks to eased conditions on EFSF loans to Greece.
Greece’s debt was significantly reduced with the private sector haircut in March 2012. The improvement of the lending terms for Greece agreed by the European creditors has also resulted in a significant alleviation of the debt.
In November 2012, the Eurogroup approved a set of measures designed to ease Greece’s debt burden and bring its public debt back to a sustainable path. These measures included:
Thanks to the reforms carried out by Greece as part of the second financial assistance programme, the Greek economy returned to a path of economic growth – it achieved GDP growth of 0.7% in 2014 after six years of recession. As a result, yields on Greek bonds came down to levels which enabled the Greek government to return to market financing. Greece successfully issued two bonds in that year: a 5-year bond in April, and a 3-year bond in July.
Greece has managed to significantly reduce its macroeconomic and fiscal imbalances. An unprecedented fiscal adjustment has resulted in a decline of the general government deficit by over 16 percentage points of GDP, to a surplus of 0.7% in 2016 from a deficit of 15.6% in 2009.
The Greek economy has improved its competitiveness by reducing unit labour costs. The improvement can be seen in the falling current account deficit: to an expected 0.5% in 2016 from 18% in 2008. Furthermore, Greece has made major progress in carrying out structural reforms – it is the best performing economy in terms of implementing OECD recommendations on structural reforms.
Greece is also making its economy more efficient thanks to improved business regulations. This can be seen in Greece’s rapid progress in the World Bank’s Doing Business ranking: to 61st position in 2017 from 109th in 2010.
Yes. ESM financial assistance for Cyprus (in support of its macroeconomic adjustment programme) included a component for bank recapitalisation (€1.5 billion). The ESM also provided a dedicated loan to the Spanish government of €41.3 billion for the recapitalisation of Spanish banks.
The EFSF provided loans to Greece, among which a portion was allocated for bank recapitalisation (€48.2 billion). Part of the EFSF loans to Ireland and Portugal were also used by the governments of these countries for bank recapitalisation. All the EFSF loans were granted in support of a macroeconomic adjustment programme.
The ESM is providing loans to Greece in support of the macroeconomic adjustment programme that the Greek government is implementing. ESM loans include a component for the recapitalisation of Greek banks (up to €25 billion).
The ESM generally provides loans for bank recapitalisation in the form of ESM notes. In the case of Greece, the government transferred the notes to the HFSF, which received common shares in the recapitalised banks and other securities in exchange for the assistance.
Yes. Before the capital raising, the banks’ bondholders and holders of preferred shares voluntarily exchanged their securities for equity capital. Another option for the banks was to sell units or wind down non-core business. These measures enabled all four systemic Greek banks to meet their capital shortfalls under the baseline scenario.
Two of the banks, Alpha Bank and Eurobank, raised enough capital to also meet the adverse scenario; they did not require further funds. Piraeus Bank and NBG required additional state aid through the Hellenic Financial Stability Fund (HFSF), which is funded by loans from the ESM.
The Single Supervisory Mechanism (SSM), which is responsible for supervising the 130 largest banking groups in the euro area, conducted a comprehensive assessment of Greek banks. The assessment revealed a total capital shortage of €14.4 billion under an adverse scenario, in which banks must be able to withstand a serious worsening of economic and financial conditions. Under the baseline scenario, which reflects current economic projections, the total capital shortfall amounted to €4.4 billion.
Due to political uncertainty, deposit holders withdrew significant funds from Greek banks in 2015, and the banks experienced an increase in payment delays as borrowers waited to see whether the government would introduce debt relief measures.
Higher capital levels will allow banks to increase lending to Greece’s economy, which is crucial for restoring economic growth. The Greek government is also working to improve the governance of its banks and taking steps to tackle the problem of non-performing loans in the banking sector.
The EFSF encouraged bondholders to participate in the PSI. It provided EFSF bonds as part of two facilities to Greece. These were the:
The PSI was a restructuring of Greek debt held by private investors (mainly banks) in March 2012 to lighten Greece’s overall debt burden. About 97% of privately held Greek bonds (about €197 billion) took a 53.5% cut of the face value (principal) of the bond, corresponding to an approximately €107 billion reduction in Greece’s debt stock.
The amounts disbursed in each of the three financial assistance programmes are presented in the following table:
Euro area, EFSF/ESM and IMF assistance for Greece
|Financial assistance programmes for Greece||Disbursed (€ billion)|
|1st programme||GLF (euro area)
|Total from euro area, EFSF and ESM
Total from IMF
Total loans disbursed
The EFSF disbursed €141.8 billion, making it Greece’s largest creditor by far. The EFSF programme was part of the second programme for Greece, and started on 1 March 2012.
Greece made major efforts to implement wide-ranging reforms, which were tied to the first financial assistance package. The challenges confronting Greece remained significant, however, with a wide competitiveness gap, a large fiscal deficit, a high level of public debt, and an undercapitalised banking system. The economic recession in Greece proved to be more serious and damaging than expected. The financial assistance provided under the first programme was not sufficient for Greece to make the necessary adjustments and to regain market access.
Furthermore, Greece’s public debt-to-GDP ratio was considered unsustainable. A restructuring of debt held by private creditors became necessary to bring the total debt level back to a sustainable path. Additional time and funds were required to Greece’s fiscal consolidation efforts with structural reforms, to boost growth, and improve competitiveness.
In the decade before the crisis, Greece failed to modernise its economy while the public sector deficit grew to unsustainable levels. After Greece adopted the euro in 2001, it was able to borrow at much lower interest rates despite its deteriorating competitiveness and public finances.
While government spending and borrowing increased, tax revenues weakened due to poor tax administration. At the same time, rising wages undermined Greece’s competitiveness, while low productivity and structural problems also contributed to the increasing economic difficulties. As a result, Greece’s economy contracted and unemployment began to climb to alarming levels.
Greece’s reliance on external financing for funding budget and trade deficits left its economy very vulnerable to shifts in investor confidence. In 2009, the Greek government revealed that previous governments had been misreporting government budget data. Much higher-than-expected deficits eroded investor confidence, causing the yields on Greek sovereign bonds (which correspond to the cost of borrowing money) to rise to unsustainable levels. The situation worsened to the point where the country was no longer able to refinance its borrowing, and it was forced to ask for help from its European partners and the IMF.
On 20 July 2017, the IMF Executive Board approved in principle a precautionary Stand-By Arrangement (SBA) for Greece amounting to SDR 1.3 billion (about €1.6 billion). In a press release published on that date, the IMF stated; "The arrangement, which supports the authorities’ economic adjustment program, has been approved in principle, which means it will become effective only after the Fund receives specific and credible assurances from Greece’s European partners to ensure debt sustainability, and provided that Greece’s economic program remains on track. A second Executive Board decision is needed to make the arrangement effective. The arrangement will expire on August 31, 2018, shortly after the expiration of the European Stability Mechanism program."
Yes, a privatisation fund must be established in Greece and managed by the Greek authorities under the supervision of the relevant European institutions. The fund will privatise and manage state assets to increase their value. The proceeds of the fund will be used for the repayment of ESM bank recapitalisation loans, for decreasing Greece’s debt to GDP ratio and for investments.
The Memorandum of Understanding (MoU) contains a reform agenda, which was designed to provide the basis for a sustainable Greek economic recovery. The reforms are built around four pillars:
The maximum weighted maturity of loan tranches is 32.5 years. This means that some loan tranches may have a longer, and others a shorter, maturity, but the weighted average cannot exceed 32.5 years.
The ESM has disbursed €46.9 billion to Greece, including €5.4 billion for bank recapitalisation.
The funds can be used for debt service, banking sector recapitalisation, arrears clearance, and the build-up of cash buffers. The funds can thus ensure financial stability in Greece, providing liquidity and stimulating the economy. They will give Greece time to complete its reform agenda, modernise its administration, and deliver growth and jobs.
Greece can receive up to €86 billion in loans under the ESM programme. This amount will be disbursed in tranches over three years. The IMF is also expected to contribute to this financing plan with its own programme, which would consequently reduce the amount of financing provided by the ESM.