Opinion of the European Central Bank of 11 December 2020 on Greece’s adherence to the New Arrangements to Borrow with the International Monetary Fund (CON/2020/32)

OPINION OF THE EUROPEAN CENTRAL BANK of 11 December 2020 on Greece’s adherence to the New Arrangements to Borrow with the International Monetary Fund (CON/2020/32) Introduction and legal basis

On 23 November 2020 the European Central Bank (ECB) received a request from the Greek Ministry of Finance for an opinion on a draft law on New Arrangements to Borrow (NAB) with the International Monetary Fund (IMF) (hereinafter the ‘draft law’) . The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft law relates to the Bank of Greece. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The draft law ratifies Decision No. 16645 – (20/5) of the Executive Board of the IMF on the NAB of 16 January 2020. As clarified in the explanatory memorandum to the draft law, the NAB was first introduced by Decision No. 11428-(97/6) of the Executive Board of the IMF of 27 January 1997 (the ‘NAB Decision’), in order to enable the IMF to more effectively fulfill its role in the international monetary system. Decision No. 16645 amends the NAB Decision and changes the credit arrangements of NAB participants. The amendments to the NAB Decision and the changes in the credit arrangements of NAB participants will become effective when the following conditions are met, but not earlier than 1 January 2021: (a) participants representing 85% of total credit arrangements have agreed to the amendments to the NAB Decision; and (b) participants representing 85% of total credit arrangements have agreed to the changes in credit arrangements, including each participant whose credit arrangement is being changed. If a participant has not agreed to the proposed changes in credit arrangements by 31 December 2020, or at any later date as determined by the Executive Board of the IMF, the proposed change to the credit arrangement of such participant will be deemed to have been withdrawn, and the credit arrangement of such participant will remain unchanged. Greece did not adhere to the NAB when they were first introduced by the NAB Decision, but it now intends to take the necessary steps in order to adhere to that Decision, as amended. The draft law further stipulates that the Greek Minister for Finance

will declare to the IMF the adherence of Greece to the NAB Decision as amended (as required by paragraph 3(c) of the NAB Decision) and will sign any relevant agreement. 1.2 The draft law authorises the Bank of Greece to provide loans to the Greek State for the provision of Greece’s resources to the IMF in accordance with the credit arrangement of Greece and the terms of the NAB Decision as applicable at any given moment. The draft law further authorises the Governor of the Bank of Greece and the Greek Minister for Finance, as a representative of the Greek State, to sign the relevant loan agreement. The draft law stipulates that the loan is paid by the Bank of Greece directly to the IMF, in accordance with the instructions of the Minister for Finance, and that this loan will be repaid to the Bank of Greece by the IMF, at the time and in the form and currency set out in the NAB Decision and in accordance with the other terms of the NAB Decision as applicable at any given moment.

2. Monetary financing prohibition

2.1 Article 123(1) of the Treaty prohibits the national central banks from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Member States. The monetary financing prohibition is however subject to certain exemptions laid down in Council Regulation (EC) No 3603/93 . In particular, Article 7 of Regulation (EC) No 3603/93 provides that the financing by national central banks of obligations falling upon the public sector vis-à-vis the IMF is not regarded as a credit facility within the meaning of Article 123(1) of the Treaty. Recital 14 of Regulation (EC) No 3603/93 clarifies the rationale behind this exemption, stating that it is appropriate to authorise the financing by the central banks of obligations falling upon the public sector vis-à-vis the IMF because such financing ‘results in foreign claims which have all the characteristics of reserve assets’. Therefore, the exemption in Article 7 of Regulation (EC) No 3603/93 must be interpreted in line with this rationale . 2.2 Reserve assets are defined as those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for interventions in exchange markets to affect the currency exchange rate, and for other related purposes, such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing . Under this definition, reserve assets must be foreign currency assets and, except in the case of gold bullion, must be claims on non-residents . 2.3 In the case under consideration, the ECB understands that the Bank of Greece will provide a loan to the Greek State in order for the latter to contribute to the IMF the resources corresponding to Greece’s participation in the NAB. For this purpose, the Bank of Greece will credit the IMF’s account with the Bank of Greece on behalf of the Greek State. The ECB understands that Greece’s participation in the NAB will result in an SDR-denominated claim of the Bank of Greece against the

IMF, using the funds stemming from the loan to the Greek State. 2.4 The ECB has considered past cases where national central banks (NCBs) directly financed the NAB-related obligations of their respective Member States vis-à-vis the IMF as falling within the exemption in Article 7 of Regulation (EC) No 3603/93 given that the financing arrangements resulted in foreign claims having all the characteristics of foreign reserve assets . However, technically, these financing arrangements did not involve any formal loan by the NCB directly to the Member State which could be seen as tantamount to a credit facility within the meaning of Article 123(1) of the Treaty . 2.5 In this context, the ECB notes that Member States have put in place a variety of arrangements to ensure the performance of their respective rights and obligations arising from their membership in the IMF. NCBs finance their respective Member States’ obligations and commitments vis-à-vis the IMF under different constructions which are governed by their respective national laws . From this perspective, the ECB considers that the provision of loans by the Bank of Greece for the purpose of financing Greece’s provision of financial resources to the IMF in accordance with the credit arrangement of Greece and the terms of the NAB Decision, as amended, as set out in the draft law, would fall within the exemption under Article 7 of Regulation (EC) No 3603/93, because using these funds would result in SDR-denominated claims against the IMF that have the characteristics of reserve assets. Therefore, these loans are not regarded as a credit facility within the meaning of Article 123 of the Treaty.

3. Miscelanneous issue

The draft law does not stipulate whether the loan to be provided as set out in the draft law will bear interest or not. The ECB invites the consulting authority to consider related remuneration aspects when promulgating the ministerial decision authorised to be issued under the draft law in order to regulate specific matters for the implementation of the NAB Decision as amended.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 11 December 2020.

[signed]

The President of the ECB

Christine LAGARDE