BRUSSELS/WASHINGTON, Feb 10 (Reuters) - European governments are considering various options to help heavily indebted Greece in what would be the first rescue of a euro zone member in the currency’s 11-year history. [ID:SGE61801C]
There is no clear procedure for bailing out a euro zone economy. Few analysts doubt that the European Union could come up with a legal justification to do so, but it might be a difficult and time-consuming legal process.
Article 122 of the EU treaty says the EU Council can decide “upon the measures appropriate to the economic situation”, but adds that such steps should mainly be if severe difficulties arise in the supply of certain products, notably energy.
It also says the Council may grant, under conditions, financial assistance to a member state, if that state “is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”. It may be hard to argue Greece’s budget deficit developed because of factors outside its control.
Greece has estimated it will need to borrow about 53 billion euros ($73 billion) this year to plug fiscal shortfalls and refinance its debt. Last month it raised 8 billion euros with a five-year bond issue, but was forced to offer a very high yield.
Below are possible steps that the EU and the International Monetary Fund could take to help Greece, if they felt aid was vital to prevent the Greek crisis from undermining confidence in the euro zone.
In practice, the EU could use a combination of the steps. It would have to decide whether it wanted to disburse aid in small, conditional increments, which might help it keep pressure on Greece to reform its finances, or in a single burst that might do more to convince markets that the problem was solved.
Calling in the IMF would likely be unpopular among many European politicians; Jean-Claude Juncker, head of the group of euro zone finance ministers, said last week Europe must solve the debt problems of Greece, Portugal and Spain without the IMF.
But the EU may have no choice if investor concerns over Greece spread further afield. [ID:nN0897366]
Non-euro zone members in distress can get EU help from a 50 billion euro balance of payments facility. Hungary, Romania and Latvia have all tapped the fund. But it is not available to euro zone members under current rules.
There has been speculation that EU members could extend debt guarantees to Greece and possibly other southern periphery states, allowing them to borrow money at low rates.
But EU law may be an obstacle to this, because it says “the Union shall not be liable for or assume the commitments of central governments” unless this is done in the joint execution of a specific project.
One way around the obstacle may be to define any aid as bilateral, extended by individual member states; a senior EU diplomat said this week, “There are some interpretations of the treaty that enable member states to act on a bilateral basis.”
The creation of a direct bailout fund, to which EU countries would contribute, might also be legally controversial, as well as technically difficult to organise and administer.
The simplest and most legally defensible course might be for EU governments or state-run institutions to buy Greek bonds from the primary or secondary markets.
EU governments could argue to their own taxpayers that this was not a bailout of Greece, but an investment. This would probably require decisions in the treasury departments of finance ministries in individual EU member states.
Under the 2007-2013 European Union budget, Greece is supposed to receive 20.21 billion euros in structural funds. The disbursement of the remainder of these funds to Greece could be front-loaded. At the end of January, 18.07 billion euros of these funds were earmarked for but not yet paid to Greece.
This has already been done for central and eastern European members of the EU, which received 7 billion euros of front-loaded structural funds last year to help them through the economic downturn under the EU’s economic stimulus package.
The front-loading of structural funds can be decided by the European Commission, so this would be relatively easy to implement.
The EIB is a bank owned by European Union governments which raises money on the markets at good rates, thanks to its government backing, and lends it for various projects in the EU.
Under the EU’s stimulus package, the EIB increased its lending to central and eastern European countries in 2009 by almost 40 percent to 11.5 billion euros. It could potentially do something similar for Greece.
The governors of the EIB — EU finance ministers — could also ask the bank to borrow money on the market and use it to buy Greek bonds. The governors could argue that this was not a bailout of Greece, but an investment in high-yielding bonds.
This would probably require an agreement at the Ecofin council of EU finance ministers. The EIB said in a statement this week that its mission and statutes “do not allow for bailouts in terms of budget deficits or balance-of-payments support to individual Member States”. [ID:nLDE6180RR]
The euro zone as a whole might issue common bonds; Greece would obtain a share of the proceeds, lowering its borrowing costs.
Juncker has proposed that common bonds could cover the first 40 percent of total euro zone government debt. This would be senior debt, guaranteed by the whole euro area, which now has 16 members.
Bond issues beyond the 40 percent would be junior debt issued by individual governments. The junior debt would most likely be more costly for governments to issue, thus encouraging a reduction of debt.
According to some estimates, common euro zone bonds could in a few years create a highly liquid bond market of some 4 trillion euros, which could compete for large investors such as China with a similarly sized U.S. Treasuries market. The market for German Bunds is about 1 trillion euros.
However, when the idea was discussed in early 2009 there was strong opposition from Germany, France and the Netherlands and indifference on the part of many others. In an interview with the Nikkei in January this year, Greece’s finance minister was quoted as saying the idea was interesting but lacked wide support within the euro zone at this point. [ID:nTOE60U00U]
EU finance ministers would have to agree on such a step and their decision would probably need to be endorsed by EU leaders.
The IMF has been providing Greece with technical advice on ways to address its fiscal challenges, and sent a mission to Athens last month.
The IMF would only take that assistance further if the EU requested its help. IMF Managing Director Dominique Strauss-Kahn has said the IMF is willing to help Greece if asked.
That help could include financing through a precautionary arrangement that might include some funding from the EU.
Another avenue could be the IMF’s so-called Flexible Credit Line, which was established last year in response to the global financial crisis. The aim of the FCL was to provide emerging market economies that had strong fundamentals with a line of credit that could protect them in case the crisis spread.
However, Greece has not had a good fiscal track record and would probably not qualify for the FCL, unlike countries such as Mexico and Colombia.
More likely is that the EU will ask the IMF to monitor whether Greece honours its commitments on fiscal reforms through some form of “enhanced surveillance”. The Fund would provide regular updates on whether Greece was keeping to its fiscal plan, which would soothe investors’ concerns. (Editing by Andrew Torchia)