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Explainer on the final disbursement of ESM financial assistance to Greece and medium-term debt relief measures

What was the amount of the ESM’s final disbursement to Greece?
The ESM Board of Directors endorsed in principle on 13 July 2018 the disbursement of the fifth and final loan tranche of the ESM programme, amounting to €15 billion, and concluded their approval of the tranche on 1 August. Out of this total amount, €5.5 billion was disbursed to a segregated account to be used for debt servicing and €9.5 billion was disbursed to a dedicated account for building up a cash buffer.
How big is Greece’s cash buffer?
In August 2018, Greece will be leaving the programme with a sizeable cash buffer of €24.1 billion. The buffer should cover Greece’s financial needs for around 22 months following the end of the programme and it represents a significant backstop against any risks.
How is the Greek government using the funds disbursed by the ESM?
Of the total amount of €61.9 billion disbursed by the ESM, €36.3 billion covers debt servicing needs, €8.8 billion covers other fiscal needs (including €7 billion for arrears clearance and €0.5 billion for structural fund needs) and €5.4 billion covers bank recapitalisation needs, of which €2 billion has already been repaid to the ESM. In addition, €11.4 billion is being used to build up Greece’s cash buffer. Overall, out of the €86 billion available under the ESM programme envelope, €24.1 will not be disbursed.
Why is there such a large amount of money not disbursed by the ESM under the programme?
The unused amount mainly derives from the substantially lower recapitalisation needs of banks compared to what was originally foreseen (€5.4 billion used out of a maximum amount of €25 billion) and from higher domestic proceeds from the cash management of the government resources through increased repurchase operations. It should also be noted that in the ESM programmes for Spain and Cyprus, the amount disbursed was also lower than the maximum amount available under their respective programmes.
How much money have the ESM and its temporary predecessor, the EFSF, disbursed to Greece?
The ESM and EFSF have disbursed a total of €203.77 billion to Greece. This amount is more than Greece’s estimated GDP for 2018 and makes the ESM and the EFSF by far the largest creditor of the country.
Is Greek debt sustainable?
The implementation of an ambitious growth strategy and prudent fiscal policies by the Greek government will be the key ingredients for debt sustainability. Through its long-term growth plan, Greece is committed to preserving its programme achievements, which includes completing the reforms that were enacted under the programme and continuing to implement further reforms designed to boost its growth potential.
In addition, the Greek government has committed to maintaining a primary surplus of 3.5 % of GDP until 2022, and in the following years to continuing to ensure that its fiscal commitments are in line with the EU fiscal framework.
Finally, the medium-term debt measures approved by the Eurogroup, together with the significant cash buffer available to the Greek government, will provide strong support for Greece’s efforts. The Debt Sustainability Analysis (DSA) indicates that gross financing needs are expected to remain below 15% of GDP and 20% thereafter, and that it is therefore considered sustainable per the definition set out below.
How is debt sustainability defined?
The assessment of debt sustainability is based on gross financing needs (loan principal and interest payments as a percentage of GDP): GFN should remain below 15% of GDP in the medium term and below 20% of GDP thereafter while ensuring that the debt to GDP ratio remains on a sustained downward path.
What are the medium-term debt relief measures approved by the Eurogroup on 22 June 2018?
The Eurogroup approved three medium-term debt relief measures for Greece:
  1. The abolition of the step-up interest rate margin related to the debt buy-back instalment of the second Greek programme as of 2018;
  2. The use of 2014 Securities Markets Programme (SMP) profits from the ESM segregated account and the restoration of the transfer of ANFA and SMP income equivalent amounts to Greece (as of budget year 2017). The available income equivalent amounts will be transferred to Greece in equal amounts on a semi-annual basis in December and June, starting in 2018 until June 2022, via the ESM segregated account and will be used to reduce gross financing needs or to finance other agreed investments;
  3. A further deferral of interest and amortization by 10 years and an extension of the maximum weighted average maturity (WAM) by 10 years on €96.4 billion of EFSF loans.
Are there any conditions for the release of funds related to these debt relief measures?
The first two measures listed above are subject to compliance with policy commitments, which is monitored by the European Commission in collaboration with the ESM and the ECB under enhanced surveillance. The Greek government has agreed to continue the implementation of key reforms adopted under the ESM programme in areas such as: tax policy and administration, social welfare system, labour and product market reforms, and financial stability.
When will the medium-term measures be implemented?
The measures related to EFSF loans must be approved by the EFSF Board of Directors, currently planned for later this year, and then the implementation is expected to take around one month.
Will there be further (long-term) debt relief measures?
Based on a DSA to be provided by the European institutions, the Eurogroup will review at the end of the EFSF grace period in 2032, whether additional debt measures are needed to ensure the respect of the agreed GFN targets.
A contingency mechanism on debt could be activated in the case of an unexpectedly more adverse scenario. If activated by the Eurogroup, it could entail measures such as a further re-profiling and capping and deferral of interest payments of the EFSF to the extent needed to meet the GFN benchmarks.
What kind of debt relief has Greece already received?
Greece’s debt was significantly reduced with the private sector haircut in March 2012. It involved a restructuring of Greek debt held by private investors (mainly banks) 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 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:
  • reducing the interest rate charged to Greece on the bilateral loans in the context of the Greek Loan Facility (GLF) by 100 basis points;
  • cancelling the EFSF guarantee commitment fee of 10 basis points (it is estimated that this will save a total of €2.7 billion over the entire period of EFSF loans to Greece);
  • extending the maturity of GLF and EFSF loans by 15 years (to an average loan maturity of over 30 years), significantly improving the country’s debt profile.
  • deferring interest rate payments on EFSF loans by 10 years (it is estimated that this will lower the country’s financing needs by €12.9 billion by 2022);
  • passing on to Greece an amount equivalent to the income of the ECB’s Securities Markets Programme (SMP) portfolio accruing to their national central bank. 
In addition, the ESM and EFSF implemented in 2017 a series of short-term debt relief measures. They included smoothening Greece’s repayment profile, reducing interest rate risk, and waiving the step-up interest rate margin for 2017. 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.
What other savings does Greece benefit from thanks to the ESM/EFSF?
The ESM and EFSF have provided loans to Greece at much lower interest rates than those the market would offer and with exceptionally long maturities. These favourable lending terms have generated considerable budgetary savings, facilitating fiscal consolidation and/or tax cuts. The amount of savings is calculated by comparing the effective interest rate payments on ESM and EFSF loans with the interest payments these countries would have paid had they covered their financing needs in the market. In the case of Greece, in 2017 the savings amounted to €12 billion, or 6.7% of Greek GDP. The savings take effect at similar level every year.
What type of post-programme surveillance will Greece be subject to?
The European Commission will activate the Enhanced Surveillance procedure, which implies quarterly missions to Greece to assess its economic, fiscal and financial situation and the post-programme policy commitments. Enhanced surveillance is required due to the large amount of money disbursed by the EFSF/ESM and the unprecedented debt relief. The ESM will closely collaborate with the Commission in the post-programme surveillance.
What will be the role of the IMF going forward?
The IMF confirmed its continued involvement in Greece in the post-programme surveillance framework alongside the European institutions.