Because of the heavy borrowing that led to Greece’s financial crisis, running a budget surplus was one of the conditions of the European rescue program in 2010. The new government wants the troika to lower this requirement of surplus to a balanced budget, freeing up cash for more government spending. In addition, structural reforms have been points of contention, with the troika wanting to see more labor market flexibility and market competitiveness, while the new coalition is looking to ramp up government hiring and increase the social safety net.
Market Realist – The above graph shows the Greek debt-to-GDP ratio, according to the current repayment schedule of Greece’s obligations. The following points illustrate Greece’s suggestions for a bailout reform:
- Greece would adhere to 70% of the structural reforms, but would seek to replace the remaining 30% with ten reforms mutually agreed to by the Greek officials and the Organization for Economic Cooperation and Development (or OECD).
- The government has deemed a primary budget surplus target of 3% to be untenable, and it has proposed that it be lowered to 1.49%, instead.
- Greece has proposed restructuring its obligations to the European Central Bank (or ECB) and European Financial Stability Facility (or EFSF). Greece has proposed converting its obligations to the ECB to “perpetual bonds”, and swapping its EFSF obligations to GDP linked bonds. Perpetual bonds pay coupons, but the principal is held in perpetuity, not maturity. GDP linked bonds, on the other hand, are repayable only if the country experiences economic growth.
- According to Kathirmerini, the government doesn’t want an extension of loans, but wants an interim measure of stop gap financing, which will tide it over until the conclusion of renegotiations. As part of the bridge financing arrangement, Greece wants to issue T-bills to the tune of 8 billion euros over and above its issuing limit of 15 billion euros. It also wants to be paid 1.9 billion euros, which are the profits from Greek bonds held by the Eurosystem. The ECB has already rejected the proposal for the payment of 1.9 billion euros in profits.
- The government wants an increased threshold of ELA funding.
Germany (EWG) is openly and strongly opposed to writing off any kind of debt and has warned the if the Greek government doesn’t soften its stance, “it’s over”. Though France (EWQ) and Italy (EWI) have expressed sympathy to the Greek (GREK) government’s cause, they too are not in favor of debt repudiation. The ECB members are willing to extend the bailout, but are not willing to negotiate on the reforms proposed by the Greek government.
The emergency meeting in Brussels of all the Eurozone (EZU) finance ministers on February 11 ended in a deadlock over the “bridge to nowhere”, the tongue-in-cheek reference to the Greek bridge loan proposal. The meeting ended in a stalemate. In an unusual move, the two parties were not able to even agree on a joint statement.
Read on to the next part of the series to understand the ramifications of a “Grexit”.