Darvas, Sapir, Wolff
THE LONG HAUL: MANAGING EXIT FROM FINANCIAL ASSISTANCE
been repaid. The European Commission expectsthe PPS of Ireland to last until 2031, given the cur-rent repayment schedule
. PPS is integrated withEuropean surveillance but goes beyond it, withmore frequent missions. Similar surveillancemechanisms have been implemented for non-euro area EU countries that have left financialassistance. Their experience suggests that thesurveillance is somewhat tighter than standardEuropean surveillance in the European Semester,but that, de facto, there is only limited leverageover national policy.Instead of a clean exit, countries can opt to exitfinancial assistance programmes with a precau-tionary arrangement from the European StabilityMechanism (ESM), which might be provided via aPrecautionary Conditioned Credit Line (PCCL) orvia an Enhanced Conditions Credit Line (ECCL).Countries need to fulfil more conditions to be eli-gible for a PCCL than for an ECCL, in exchange forwhich fewer conditions are imposed on PCCL thanon ECCL beneficiaries
. A precautionary facilitycould be a powerful way of making exit from a pro-gramme more robust. When a country hasregained market access, it might be tempted toask for a clean exit. However, if debt levels are highand significant negative shocks cannot beexcluded, the precautionary credit line allows thecountry to issue debt safely. In case of a shock,the country could draw on the ESM credit line with-out having to undergo a full new application for anew financial assistance programme. Precaution-ary support could be perceived well by markets,leading to lower borrowing costs and therebyimproved post-exit prospects. Furthermore, anECCL (but not the PCCL) might qualify the countryfor the European Central Bank’s Outright MonetaryTransactions (OMT), which could further boostmarket confidence. However, the ECB has said thatit will decide on OMT purchases case-by-case.Although Portugal, Greece and Cyprus might meetsome of the criteria for a PCCL when they plan theirprogramme exits, they are unlikely to meet all.Nonetheless, they could still obtain precautionaryFinally, and perhaps most importantly, higher eco-nomic growth and greater job creation will be of central importance for the success of the countryand its citizens. Far-reaching domestic reforms arenecessary and many deep structural failings,which have driven a country into financial assis-tance, have been only partially addressed in thecourse of the programme.This Policy Contribution assesses the risks for Ire-land, Portugal and Greece of exit from financialassistance programmes. Beyond domesticreform, what can be done to improve growthprospects? What support should a country receiveafter exiting a financial assistance programme,and under what conditions? The actual practice of long-term surveillance and post-programme sup-port are major issues that will determine both thepolitical acceptance of surveillance and the effec-tiveness of the implementation of reforms.
EUROPEAN POLICY OPTIONS AND THE EUFRAMEWORK
Greece, Ireland and Portugal will continue to haveclose relationships with their European creditorsfor a long time post-programme, given that theaverage maturities of official EU loans are inexcess of 20 years.The exact nature of the relationship between cred-itors and debtor EU countries is laid down in EUrules but depends on which of the three options(clean exit, new programme or precautionarycredit line) is chosen at the end of the relevant pro-gramme. But what is clear is that, for all countries,the priority for a long period will be to keep publicfinances in check and increase growth potentialto ensure debt sustainability.Countries, like Ireland, choosing a clean exit, enterinto post-programme surveillance (PPS)
, whichstays in force until 75 percent of the outstandingEuropean Financial Stability Facility/EuropeanFinancial Stabilisation Mechanism/European Sta-bility Mechanism (EFSF/EFSM/ESM) loans have
2. PPS mirrors the Interna-tional Monetary Fund’sPost-Programme Monitor-ing, laid down in IMF Deci-sion 13454-(05/26). Foreuro-area countries, thedetails of PPS are set out inArticle 14 of Regulation472/2013 on the strength-ening of economic andbudgetary surveillance. PPSentails specific reportingrequirements, which can beextended on a case-to-casebasis in the country-spe-cific Memorandum of Understanding of a pro-gramme. Moreover, themember state under PPSwill be subject to regularCommission review mis-sions, in liaison with theEuropean Central Bank.These report to the Eco-nomic and Financial Com-mittee, the EuropeanParliament and the relevantnational parliament. TheEurogroup, on the basis of aCommission proposal, canrecommend that themember state under PPSadopts corrective meas-ures. For information on IMFprocedures, seehttp://www.imf.org/exter-nal/np/exr/facts/ppm.htm.3. See page 40 of EuropeanCommission (2013c).4. The criteria for judgingwhether an ESM country iseligible for a PCCL are: (a)that it respects the commit-ments under the stabilityand growth pact; (b) a sus-tainable general govern-ment debt; (c) that itrespects the commitmentsunder the excessive imbal-ance procedure (EIP); (d) atrack record of access tointernational capital mar-kets on reasonable terms;(e) a sustainable externalposition; and (f) theabsence of bank solvencyproblems that would posesystemic threats to the sta-bility of the euro-area bank-ing system.
‘Greece, Ireland and Portugal will continue to have close relationships with their Europeancreditors for a long time post-programme, given that the average maturities of official EU loansare in excess of 20 years.’