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What it means to exit Enhanced Surveillance

By Tasos Dasopoulos

Greater independence in economic policy is perhaps Greece’s biggest gain from the end of next week when the enhanced surveillance regime, which has long been discounted by markets, will now formally expire.

This special regime, which was decided in July 2018 specifically for Greece, essentially extended the close quarterly surveillance of the economy for another four years (in the period 2018-2022) after the eight years of the memorandums. In the summer of 2018, Greece formally completed the 3rd memorandum, having left many, important outstandings in banks, bad loans, operation of the public sector, insurance system, social policy, labor market, business environment, privatisations, liberalization of markets, for which it was judged that should be monitored on a quarterly basis. In fact, in order to have a complete “simulation” of the years of the memorandums, in the agreement for the settlement of the debt, it was decided to have a “payment” that will accompany the implementation of the reforms.

Thus, the solution of medium-term debt measures was adopted which would be implemented every six months if Greece had positive evaluations. One of them was the payment of 5.3 billion of the profits of the bonds bought by the ECB and other central banks in 2010 to contain the rise in Greek bond yields. The “profit” arose from the fact that the Greek bonds of the Central Banks were not refinanced all these years and did not participate in the 2011-2012 debt reduction (the well-known PSI). This money should have been given to Greece at the end of the 2nd memorandum, but it had ended ingloriously in the summer of 2015.

The deal was that if Greece did well it would receive the bond’s profits in eight equal installments of €650 million.In the same package was an interest rate penalty that Greece had for a loan of about €12 billion in 2012 from the EFSF for bond repurchases. The agreement for this loan stipulated that if it was not repaid by 2016, Greece would pay an interest rate increased by 2.5%. The additional interest rate resulted in additional interest costs of €220 million per year. So, with the medium-term conditional measures that were decided, 8 equal six-monthly installments would be given which consisted of 650 million euros from bond profits and 110 million euros from the postponement of the penalty interest payment for one semester.

Strict financial control

At the level of surveillance, along with the reforms, Greece was obliged to announce to its creditors every measure with significant fiscal costs. He could implement it only after their full agreement and after he had incorporated the adjustments or changes that the EU, the IMF, the ESM or the ECB would request. The first important change after the end of enhanced supervision and the inclusion of the country in the evaluation based on the European semester is the fact that Greece will not be judged for every measure it takes but by the achievement or not of the goals it will declare in the multi-year its budgets like the rest of the EU member states.

The image in the markets

With the adoption of the regime of enhanced supervision, Greece, although it had completed the adjustment program, gave it the image of an economy that is still at risk of bankruptcy. With very careful moves, Greece regained its place in the international bond market. However, the absence of the minimum investment grade, delays the removal of obstacles, for investments by more “conservative” and consequently more long-term investors for Greek bonds, such as insurance funds and insurance companies.

The lifting of the enhanced supervision will give a clear argument to the rating agencies to remove their doubts and gradually upgrade Greece to at least the BBB- level by 2023.

Roughly the same picture existed for foreigners who wanted to make direct investments in Greece. The Government’s outward-looking policy has reversed this climate, but the end of enhanced supervision will give a new impetus to foreign investment.

Perhaps most positively for prospective investors and with the completion of enhanced supervision, Greece is generally changing the image of a faltering economy that was the “black sheep” of Europe.

Source: Capital

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