Cause and Effect in European Politics and Law

Anticipating the white smoke

Ralitsa Kovacheva, July 12, 2011

The Greek debt must be reduced - this is the only clear message from the meeting of eurozone finance ministers. But how - this is the question that is still expecting an answer and is provoking a lot of speculations and guesses.

According to the official statement of the Eurogroup, “ministers stand ready to adopt further measures that will improve euro area’s systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates”.

All attempts of journalists to extort some explanation from Commissioner Olli Rehn and Eurogroup President Jean-Claude Juncker what exactly these measures could be failed. The answer was all the same – concrete proposals will be presented “shortly”. These will be made by the Eurogroup Working Group, headed by Vittorio Grilli.

One option for expanding the scope of the rescue fund is to allow it to buy debt on the secondary markets - a proposal, made earlier this year by the European Commission, which however was rejected by eurozone leaders, mostly because of Germany's opposition. This would enable Greece to buy-back its debt at lower prices and thus to significantly reduce it - a result that would not be achieved with the French plan for a voluntary roll-over.

The only comment of Commissioner Olli Rehn on the matter was that at that stage he would not exclude any option. Eurogroup President Jean-Claude Juncker tried to “translate” the vague statement of the Ministers to the media. We are talking about increasing the scope of the EFSF, we are talking for the first time about lengthening the maturities of the loans, we are talking for the first time about lowering interest rates, as well as we are indicating that talks with the private sector are ongoing, which clearly shows that there will be private sector involvement, Mr Juncker explained. With the important remark that these new measures will be available not only to Greece but also to other countries subject to a bailout. As we have repeatedly written, Ireland and Portugal also believe that the interests on their loans are too high, especially against the background of the lowering the Greek interest rate earlier this year.

As for Greece, Mr Juncker was very specific: “If the weight of Greek public debt is corrected downwards, if the interest rates are lowered and if maturities are lengthened, this would be a great help for Greece”. According to The Financial Times, debt reduction through buy-back has been set as a condition by the private creditors. The newspaper cited a document of the Institute of International Finance, which represents the private financial institutions: “Plans focused solely on covering Greece’s financing needs without debt reduction will not work at this stage to stabilise markets and reverse contagion”.

So far, the biggest problem of the EU leaders was to agree a form of private sector participation, which would not be defined as a Greek default by the credit rating agencies. Yesterday, however, several countries have made it clear that this is no longer a defining condition, and the default is no longer a taboo. Moreover, given the growing confrontation between the EU and the credit rating agencies. The European Central Bank, however, maintains that “a credit event or selective default should be avoided.” Which does not mean that the Eurogroup “would do everything to provoke a credit event,” Jean-Claude Juncker noted.

He was categorical that there would be a second bailout for Greece. However, the new Director of the IMF and former French Finance Minister Christine Lagarde didn’t sound so sure: “As regards a possible new programme, in my view we’re not at the stage of discussing the conditions and terms and length and volume, and nothing should be taken for granted”.

The Eurogroup president denied any secrecy about yesterday's meeting, convened by European Council President Herman Van Rompuy. He refuted also the rumours that the meeting was devoted to Italy. According to the official press release of President Van Rompuy, the meeting was organised a week ago and the issues discussed were the new loan to Greece and “recent developments in the euro area”. The statement does not mention Mr Vittorio Grilli (the head of the Eurogroup Working Group) as a participant, as was reported by media yesterday, but according to the Italian representation in Brussels, neither Italy was the topic of the meeting, nor any Italian representative took part in it, EUobserver wrote.

Given these circumstances, there is no doubt that the finance ministers and the leaders of the eurozone will spend the summer discussing the hot issues in the euro area, instead of going to the beach. The debt crisis will continue to smoke until, like the papal conclave chooses a new pope, the smoke becomes white - a sign that the choice was made.