Better without precautionary funding

The International Monetary Fund and others appear to be urging the Greek government to agree to a precautionary program when the current eurozone adjustment program ends, but Prime Minister Antonis Samaras, facing increasing political pressure at home, is seeking a clean exit from both the eurozone and the IMF financial assistance programs. Whether or not he will be successful remains to be seen, nevertheless it makes little sense for Greece to continue getting IMF funding in the years ahead.

Back in June 2011, eurozone leaders decided to give the EFSF, the temporary bailout fund, the power to offer precautionary credit lines to member states under certain conditions.

The European Union precautionary credit line was modeled after a similar IMF program and had a one-year duration renewable for six-months, twice. The typical size of the credit line ranged from 2 to 10 percent or gross domestic product (GDP), which would have translated in up to 18.2 billion euros for Greece. The qualifying country could have drawn from three types of credit lines in the form of a loan or primary bond purchase:

The precautionary conditioned credit line (PCCL), the enhanced conditions credit line (ECCL) and the enhanced conditions credit line offering partial risk protection to sovereign bonds (ECCL+). In the latter type, ECCL+, the holder of the partial protection certificate was given a fixed amount of credit protection equal to a percentage of the principal amount of the sovereign bond.

The bond and the certificate were issued at the same time but were supposed to be detachable and trading separately. In the permanent bailout fund’s (European Support Mechanism – ESM) guideline on precautionary financial assistance, the first two types of credit lines are offered, the PCCL and the ECCL.

Generally speaking, it looks harder for a country to meet the economic conditions for the PCCL, which entails lighter surveillance, than qualifying for the ECCL. It should be noted the enhanced conditions credit line, which includes the possibility of EFSF/ESM primary market purchases, has been mentioned in a statement by the European Central Bank in the past as fulfilling the conditionality criteria for Outright Monetary Transactions (OMT), its bond-buying program. From this point of view, it may be preferable.

In any case, if Greece enters such a precautionary program it will be subject to enhanced surveillance by the European Commission in liaison with the European Central Bank and other EU bodies “and where appropriate by the IMF,” for as long as the credit line is available. It will be looser than the strict surveillance seen under the full EU/IMF adjustment program during the last four-and-a-half years but the government will still have to sign a program and be under some kind of supervision.

This arrangement may be viewed positively by the markets and others although it will be seen as a sign of weakness that Greece cannot attain full market access alone. Understandably, the coalition government would like to avoid such a development, knowing it will come under attack from the leftist SYRIZA and other anti-bailout parties ahead of the crucial presidential vote in Parliament in February.

Moreover, Samaras does not forget that conservative Premier Spanish Mariano Rajoy held his ground, opposing calls for a precautionary program in the fall of 2012 and was subsequently vindicated with Spanish yields falling, sharply aided by ECB policies. He would also like to replicate the successful Irish and Portuguese clean exits from their respective bailout programs, although there are differences between Greece and the other countries and the circumstances are not the same.

We argued last week that the government should try to gain back the support of its sole ally so far, the markets. It can do so by proceeding with a few privatizations and reforms in addition to the good newsflow from the fiscal front, the GDP and the unemployment, falling to 26.4 percent in July. It should try even if it risks suffering an embarrassing defeat over one of the reform bills in Parliament. This will help sooth market concerns as Greece is likely to start the disengagement process from the IMF program and funding.

Investors can understand that there is no point for Greece to borrow with a floating rate of 3.8 percent or a fixed interest rate of 5.05-5.15 percent for five years from the IMF when it can find the same money at the same cost or cheaper from elsewhere, namely private investors with or without a precautionary credit line from the EU. If, as expected, there is some form of agreement between Greece and the European Commission on some key reforms and debt relief, the IMF program and funding will be eventually redundant.

Whether or not Prime Minister Samaras manages a clean exit from the eurozone program remains to be seen. However, there is no point for Greece to get IMF funding in 2015-2016 as long as it can borrow the same amount of money from elsewhere more cheaply.

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