With little clear progression in the negotiations between Greece and its creditors it is looking increasingly likely that a second bridge loan could be needed.
[...] Focus magazine reported over the weekend that the German government is increasingly pessimistic about the negotiations over the third bailout being wrapped up any time soon. The magazine cites unnamed government sources suggesting that the special session of the Bundestag slated for mid-August in order to approve the bailout may have to be moved. This is just one in an increasingly lengthy line of reports suggesting that the bailout negotiations may not be completed in time.
[...]
Greece has to repay €3.2bn to the ECB on 20 August. In order for this money to be released in time approval in a number of national parliaments needs to begin on the 12/13 August according to reports. This means the negotiations have to be completed by 10/11 of August with approval from the eurozone finance ministers coming quickly afterwards. Of course, we have seen such dates fudged before (they always seem to overestimate the time needed for national approval to give some wiggle room).[...]
How much would a second bridge loan total and where would it come from?
The agreement reached between Greece and its creditors noted that it would probably need around €5bn in August on top of the €7.16bn it received in July. Given the issues we encountered around the previous bridge loan, it is likely to once again come from the European Financial Stabilisation Mechanism (EFSM) [...].
There remains just enough in the EFSM to provide a second bridge loan to Greece. Since the final tranche of the Portuguese bailout was not paid there was €13.2bn left before the €7.16bn disbursement of the first bridge loan, meaning there is conveniently the exact amount needed remaining.
The EFSM regulation has also now been updated so that any future loan to a eurozone country once again requires the non-eurozone countries to be insulated from any financial liabilities. It’s not entirely clear where this would come from this time around. It could simply be guaranteed by the eurozone states or they could pledge their own government bonds or another stream of income to cover the liability.
Why might the Eurozone favour a second bridge loan?
The original bridge loan was a bit of a disaster, at least in political terms. It managed to anger a number of non-Euro countries and rowed back on a previous European Council decision. It was also incredibly circular [...].
So why would the Eurozone want to go through this exercise again? Well, as explained above, it has little choice if it doesn’t want Greece to default on the ECB. However, it also settles a tricky problem for the eurozone – whether Greece will have to do further reforms before cash is released. By virtue of having to draw up a new EFSM bridge loan and have non-eurozone countries involved there will have to be a new short term reform programme tied to the loan. It also reduces the size of the first tranche of the loan and the total amount that needs to come from the eurozone bailout fund the ESM (though overall this makes little difference given the indemnity for non-eurozone states). These are not huge issues but may marginally be useful.
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