On the eve of the European Council meeting on January 30 a rumour of a German proposal emerged Greece to submit its budget sovereignty to an EU Commissioner, as a condition to receive the second bailout. The proposal provoked strong reactions and was eventually swept under the carpet - until Monday, February 6, when the Merkozy duo (Angela Merkel and Nicolas Sarkozy) officialised it in a joint interview.
The leaders of France and Germany Angela Merkel and Nicolas Sarkozy said that if Greece wanted to get a second bailout it had to collect all the revenues in a special escrow account so as to guarantee its debt payments. Indeed, the prioritisation of debt payments is the first point of the proposal mentioned above, although it remained shaded by the far more "spicy" idea for a budget commissioner. Here's how the proposal is formulated, according to the text published by The Financial Times.
"Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its commitments after PSI [Private Sector Involvement] and will positively influence market access. De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement."
Previous attempts of the EU and the IMF to force Greece to honour its commitments and to implement promised reforms by threatening that they would not release another tranche of the 110 billion euros loan proved to be unsuccessful. Greece always comes out with a counter threat of default and always receives money from its creditors, without fulfilling its part of the deal. So now obviously the goal is to avoid that possibility of blackmail, ensuring the debt payments. If Greece does not fulfil its commitments and thus it does nor receive a future tranche, it will be entirely at the expense of its own budget.
Ultimately, though not so bluntly as the proposal for a Budget Commissioner, this idea deprives Athens from its budgetary sovereignty too as it states unambiguously its fiscal priorities. The topic was discussed in detail in the latest edition of euOUTside.
As French President Nicolas Sarkozy said in his joint interview with Angela Merkel - "they have no choice." If Greece does not receive the second bailout default is only a few days away. Apparently, however, the creditors also have little choice if they want to avoid pouring more money into a bottomless barrel. According to The Financial Times, the proposal enjoys the support of the European Commission. Luxembourg Prime Minister and Eurogroup President Jean-Claude Juncker has also expressed his approval.
In order to obtain the second rescue loan, Athens must complete the deal with private lenders for partial write off of its debt and accept the terms of the Troika (new budget cuts, public job cuts, and structural reforms). For Wednesday (8 February) a meeting of eurozone finance ministers is scheduled to approve a second Greek bailout, if the above conditions are met. According to the latest estimates by 2014 the country will require funding of 145 billion euros.