Greek officials are trying to persuade creditors in the euro area to convert funds originally earmarked for banks into a credit line to help the nation escape its bailout program, according to two people familiar with the matter.
The Greek proposal would see a new financial tool combining unused funds from its existing program with the profits that euro-area central banks made on their Greek bonds portfolio, said the people, who asked not to be identified because they are not authorized to speak publicly on the matter. That would give Greek officials a backup plan should they struggle to sell bonds and also allow them to avoid the conditions tied to existing facilities.
The pitch epitomizes Prime Minister Antonis Samaras’s balancing act as he tries to convince voters that Greece is regaining its economic independence while reassuring investors that Europe’s most indebted state can still refinance its liabilities without the international lifeline which has kept it afloat since 2010.
The size of the envelope might reach 15 billion euros ($19.2 billion) through 2016, one of the people said. That figure includes about 11.5 billion euros of bank recapitalization funds and about 3.7 billion euros of profits that euro-area central banks made on Greek bonds and have committed to returning to Greece.
Special Fund
Samaras said on Oct. 17 that Greece is in negotiations with its international creditors over a precautionary credit line to be available should a spike in borrowing costs complicate its access to bond markets from next year. The conditions attached to the aid will determine how strongly Samaras can argue to his voters that the measure doesn’t constitute a new bailout.
Greek 10-year bond yields fell 4 basis points to 8.03 percent at 12:56 p.m. in Athens today and the Athens Stock Exchange Index rose 3.5 percent. While the yield remains below its peak of 44 percent in March 2012, it surged to a nine-month high last week after euro-area finance ministers voiced doubts about Samaras’s market exit plan.
Under the structure Greek negotiators are pushing for, the European Stability Mechanism would create a special fund from unused money from Greece’s existing 240 billion-euro bailouts that had been set aside for the sole purpose of keeping the banking system capitalized, the people said. That set-up would bypass the ESM’s Precautionary Conditioned Credit Line, which Greece will probably be deemed ineligible for, and the stricter Enhanced Conditions Credit Line, which the Greek government wants to avoid because of the strings attached to it.
Last Resort
Emboldened by an improvement in Greek public finances and a return to bond markets after a four-year exile, Samaras has staked his political credibility on exiting the bailout program this year and easing the country’s unpopular economic oversight by the euro area and the International Monetary Fund. The plan met with skepticism from investors, triggering a selloff in Greek government bonds, which lost 18 percent in the past month, more than any other sovereign security tracked by Bloomberg’s World Bond Indexes.
A precautionary program would see Greece drawing funds only as a last resort if it finds itself again shut out of markets, rather than the existing arrangement in which euro-area and IMF officials release each tranche after reviewing the country’s progress in meeting program targets.
The officials negotiating the deal still have to agree on what kind of oversight should be attached to the facility, the people said. The plan is also dependent on Greek lenders not having to tap the bank recapitalization fund reserves when the European Central Bank releases the results of a health-check result on Oct. 26.
Greece’s creditors are concerned that too small a facility won’t convince bond investors the backstop is strong enough, one of the people said.
