Stability Pact: the “dark” side of the Greek reform debate

Stability Pact: the “dark” side of the Greek reform debate

About a month after the election of the new government in Greece, in Brussels in mid-June, the “real» discussion on the reform of the Stability Pact.

This first discussion probably goes without saying that it will take place with the participation the “official” finances of Athens, for new government personnel should not have been trained.

The importance of this first discussion, which should be completed in the fall at Ecofin in order to pass the Summit before the end of 2023, is that it will set the margins for adjustments to be made in terms of change of treatment topic debt.

A change, which will concern the policies of member countries for the Budget 2024.

Why is this so important? But why at the end of 2024 will the ECB reconsider its decision on “closingof the PEPP, i.e. the program with which he supported alongside the APPLICATIONthe government bonds of the member countries of the euro zone and especially those over-indebted and outside the investment grade category, such as Greek.

One of the reasons why this part of the Eurogroup and ECOFIN decisions can be decisive is that the ECB has in its portfolio on 39 to 40 billion euros of Greek public debt bonds.

To understand how this relates to the Stability Pact changes, here are the breakpoints at which the preliminary debate on the Stability Pact changes is heading.

The Commission and the Germans

The Commission, in the context of the proposals it has presented, essentially determines the course of debt reductionthat each country should formulate its own medium-term structural budget plan.

The debt of the member country is required to follow a “reasonable” downward trend.

The content of “reasonable” is defined on the one hand by its scenarios economic situation in the euro area the following period and on the other hand from the corresponding adaptation scenarios of the economy of each country within this environment.

Of course, as some analysts who have been following these discussions from the start point out, “the methodology how this will be done is defined, but understanding it requires in-depth knowledge of macroeconomic modelingas well as its acceptance validity of such models.

And moreover, this process incorporates calculations using concepts such as “structural balance” And “productive gapwhich require dialogue and negotiation between the Commission and the member country.

For heavily indebted economies, additional restrictions are also proposed, including the request for debt reduction of at least 0.5% of GDP per year (1% reduction requested by the Germans).

At the same time, little or nothing changes from the previous rules regarding whether or not to count public investments, i.e. public spending on deficit and debt. Even transfers of resources from the EU, such as the NGEU they are included in the deficit of the loans section and deducted only in the bonus section…

In other words, investments, even when they are in line with European objectives, i.e. the “Green» transition And “digitization», also weigh on the new regime deficit and debt and mobilize the consequences of “excessive deficit»…

The round has begun

With these data, whether in their loosest version, that of the Commission’s proposal, or in the strictest that of the Germans, 2024 is a year that… we return to budgetary disciplinethat’s to say to reduce public spending and return to the commitment to reduce the debt.

With these data, going back to the issue of debt in 2024, what exactly is the ECB going to do and how its behavior vis-à-vis the Greek debt, which it bought back, becomes decisive.

The ECB has around 40 billion euros worth of Greek bonds in its portfolio. These do not expire immediately and the only way for the ECB to get rid of them to close the PEPP is to start sells In secondary market.

What does that mean; It means a complete reversal of the current environment in the secondary marketin which they are available few “free” obligations less than 13 to 15 billion euros – and thus their prices are maintained at very good levels, although they are currently non-investment grade.

Indeed, the Greek government has drastically reduced debt issuance to unprecedented levels, only 12 to 14 billion in 2022 and only 7 billion in 2023. But what if the ECB instead of “look for” find difficult to find Greek papersstart to sells en masseWhat he bought in PEPP, since it must be closed?

The obvious answer to this is that the ECB is in no way going to cause a destruction in the European public debt system and in fact within the framework of the withdrawal of a tool like the PEPP which “was doneespecially to protect the Greek public debt.

She is the an essential face of the truth.

Because the other side too essentialis that the ECB in the context of the withdrawal of the PEPP can “managed“with absolute”legality» the exercise of unsustainable fiscal pressure. In Greece and all other over-indebted countries, with the “sales“debt, as long as it considers that it does not result from a”reasonable» tendency to reduce it with fiscal measures…

A move, which will be completely compatible with the “relaxed» proposal to reform the stability pact with regard to the debt criterion… These developments concern the environment in which new governmentwhatever it is, will have to design the economic policy for 2024.

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