The two most important stories out of Greece on Tuesday were: 1) the IMF’s leaked report on Greek debt sustainability, and 2) the race to secure between €7 and €12 billion in bridge financing to hold Greece over until the ESM gets off the ground.
Although a new program is in the works and should get the greenlight once Tsipras succeeds in forcing Greek lawmakers to legislate away their sovereignty and any semblance of pride they have left, Athens has bills that need paying, the most important of which comes due to the ECB (on its SMP holdings) on July 20. The Greeks must make the payment to Mario Draghi - otherwise the central would be compelled to interrupt the liquidity drip that’s keeping the Greek banking sector from collapsing altogether. There’s also the issue of public sector salaries and pension payments which Greeks would prefer to receive in euros as opposed to the IOUs suggested by German FinMin Wolfgang Schaeuble.
We outlined the options available [9] for bridge financing on Tuesday morning, noting that all alternatives involve creditors effectively paying themselves either literally or in spirit or otherwise entail the perpetuation of some manner of ponzi scheme (i.e. allowing Greece to sell T-bills to Greek banks).
On Wednesday, the EU Commission decided to go the EFSM route and will look to tap €7 billion of the €11-12 billion that remains in the fund. The formal request by the EU Commission says the funds from the EFSM "aim to provide a bridge financing to allow Greece to face some urgent financial obligations until it starts receiving financial assistance under a new programme from the ESM [and] would safeguard financial stability in the Union and in the euro area."
This isn’t as simple as it sounds. The EFSM was replaced by the ESM and wasn’t really supposed to be used again, so going back to the well is problematic from a political perspective. There are a number of issues here, but for the sake of brevity, here’s FT’s summary [10]:
The European Commission has submitted a formal proposal to use an EU-wide rescue fund to rush aid to Greece to ensure Athens does not default on €7bn it owes on Monday, a proposal that will require Britain to rally allies if it wants to block it.
If Athens were to default on the ECB bond, the eurozone central bank would be forced to pull emergency loans keeping the Greek banking sector afloat. “It’s the most European, politically and economically sound, readily available option,” said the EU official. "Without it, there is a risk the euro summit [agreement] won’t work."
The commission’s decision comes despite angry objections to the plan by George Osborne, the UK chancellor, who at a meeting of EU finance ministers in Brussels on Tuesday called it "a non-starter".
London is furious that the commission is risking inflaming British public opinion ahead of the UK’s referendum on EU membership, which will be held by 2017.
What funds would be used for an additional €5bn that comes due in August has not yet been decided, he added. The EFSM bridge loan would be for three months.
"This is not an easy option," Mr Dombrovskis said. "We are aware of serious concerns by non-euro member states."
If officials fail to reach a compromise, Mr Osborne will have to rally a number of EU members to block the proposal. Although he has the support of some other non-euro countries — both Denmark and Sweden registered their objections at Tuesday’s meeting — it is unlikely that Downing Street has enough allies at present to block the plan.
Even the formal attempt by Brussels to use this fund is a big political setback. Mr Cameron has trumpeted securing a "black and white" promise in 2011 that the fund would be mothballed so British taxpayers would not be part of eurozone bailouts.
The EU-wide EFSM was set up at the onset of the eurozone crisis with €60bn in lending capacity. When the eurozone moved to set up a new, permanent rescue fund for the currency union’s 19 members, Mr Cameron won agreement at an EU summit that the EFSM would never be used again for eurozone rescues.
In short: the UK isn't keen on being roped into this fiasco via implicit participation through the EFSM.
In order to mitigate this, the EU will look to insure non-euro nations against losses on the bridge loan by pledging certain collateral as a guarantee. Here's FT again [10]:
One compromise EU officials are discussing involves indemnifying non-euro countries from any losses from the loans to Greece. It is not yet clear whether the move would be legally feasible and whether pledging collateral would be politically acceptable to eurozone countries.
And here is the punchline:
As collateral, the eurozone could pledge the €3.6bn in profits from Greek bonds owned by the ECB.
So Europe will pledge profits from the ECB's Greek debt holdings as collateral for a loan to Greece that will be used to make a payment to the ECB for the very same Greek debt holdings.
As if that's not absurd enough, consider also that one of the alternative options to using the EFSM was returing SMP profits to Greece, so effectively, one bridge financing option is being used to collateralize another bridge financing option.
Just when you think the Greek tragicomedy has reached peak absurdity, Europe one-ups itself.
