Lessons from financial assistance to Greece – Technical appendix 11 June 2020 TECHNICAL APPENDIX | 1 Contents Summary 2 1. Terms of Reference – ESM evaluation of financial assistance to Greece 3 1.1 Introduction 4 1.2 Context 4 1.3 Evaluation purpose and scope 6 1.4 Roles and responsibilities 9 2. Methodology 19 2.1 Introduction 20 2.2 Evaluation strategy 21 2.3 Elaboration of intervention logic 33 3. Appendices to Chapter 3 – Relevance 38 3.1 Methodological background 41 3.2 Conclusion 42 3.3 References 42 3.4 Further reading on bond market spillovers 42 4. Appendices to Chapter 4 - Effectiveness 44 5. Appendices to Chapter 5 – Efficiency 52 6. Appendices to Chapter 6 – Sustainability 66 7. Appendices to Chapter 7 – Cooperation and Partnerships 69 8. Appendices to Chapter 7 – Online and social media analysis 73 8.1 Introduction 74 8.2 Methodology 75 8.3 Analysis 81 8.4 Qualitative findings or room for further research 97 8.5 Conclusion 98 8.6 Bibliography 99 8.7 Appendix 99 9. Greek crisis timeline 108 2 | PROGRAMME EVALUATION II SPECIAL | JUNE 2 0 2 0 Summary This technical appendix was compiled to provide further background to the second ESM evaluation focusing on financial assistance to Greece. Its purpose is to enhance transparency on the technical aspects of the conduct of the evaluation exercise, and the various strands of analysis. The evaluation was designed to ensure maximum impartiality, within the available organisational set-up, and methodological rigour. By describing the process and the various strands of analysis, the appendices support the evaluation’s credibility. This evaluation adopted the same general approach as the first ESM evaluation in 2016–2017, using the mixed-methods approach and an external evaluator as the report owner. In addition, an external advisory group reviewed various elements of the evaluation and advised on quality issues. The terms of reference approved by the ESM Board of Governors on 13 June 2019 have been made public in their original form in Appendix 1. Appendix 2 describes the evaluation process and methodology. Appendix 3 provides further analysis on bond market spillovers discussed in Box 3.2 of the evaluation report. Appendices 4 and 6 contain additional charts supporting the assessment on programme effectiveness and sustainability. Appendix 5 relates to the efficiency chapter and contains a technical assessment of short- and medium-term debt relief measures. Appendix 7 supports the chapter on cooperation and partnerships. Appendix 8 presents a technical paper on the online and social media analysis, and the final appendix lays out the crisis timeline. TECHNICAL APPENDIX | 3 1. Terms of Reference – ESM evaluation of financial assistance to Greece1 1 As approved by the ESM Board of Governors on 13 June 2019. 4 | PROGRAMME EVALUATION II SPECIAL | JUNE 2 0 2 0 1.1 Introduction The main objective of ex post evaluation is to seek lessons from past interventions and to support a learning organisation. A secondary objective is to provide transparency and promote accountability. Independent evaluation supports informed policy decision-making processes going forward. Moreover, drawing lessons from the financial assistance further enhances the ESM's ability to tackle potential future crises. In June 2016, the Board of Governors (BoG) mandated the ESM to carry out an evaluation of financial assistance provided by the European Financial Stability Facility (EFSF and the European Stability Mechanism (ESM). At the ESM Annual Meeting on 15 June 2017, Ms Gertrude Tumpel-Gugerell, the High-Level Independent Evaluator for the first evaluation exercise, presented her final findings and recommendations to the BoG. Subsequently, the BoG issued a statement welcoming the report and mandating ESM management to address some of the specific findings and recommendations. In its statement, the BoG called, among other things, for “conducting an evaluation of the Greek programmes after completion as these were not covered by the current report.”2 On 21 February 2019, the BoG Chairperson appointed Mr Joaquín Almunia to lead the independent evaluation that will focus on the EFSF/ESM financial assistance programmes provided to Greece. In the absence of a specific ESM evaluation policy, these Terms of Reference (ToR) and the good practices of the international institutions guide this independent evaluation’s approach. 1.2 Context The Greek crisis that surfaced in 2009 resulted from sizeable macroeconomic imbalances that had accumulated in the years following the introduction of the euro. This accumulation weakened the long-run prospects and fundamentals of the economy. It also undermined market confidence, as evidenced by escalating borrowing costs after 2009. The accumulation of Greece’s economic imbalances led eventually to its loss of market access at sustainable rates, which was seen as a challenge for the financial stability of the entire euro area. Greece requested financial assistance and conducted three economic adjustment programmes. During Greece’s initial years under adjustment programmes, overall economic output fell by 26% while private investment collapsed and unemployment rose sharply. Overall, programme financing to Greece amounted to €298 billion – almost 170% of GDP. The first programme (2010–2012) focused on the correction of pressing fiscal imbalances. The substantial output losses during the first programme had adverse implications for debt dynamics, which resulted in turn in the second programme’s (2012–2015) emphasis on regaining debt sustainability and promoting reforms. Policy implementation allowed Greece to achieve an incipient market access in 2014. Following national elections in early 2015, a new government took office and its policy course reversed market confidence. As the prospects for 2 https://www.esm.europa.eu/press-releases/esm-board-governors-statement-evaluation-report. TECHNICAL APPENDIX | 5 market access faded, a third programme was needed to stabilise banks and the economy. Capital flight and a liquidity crunch led to a collapse in confidence and investment. Once Greece had reaffirmed its policy resolve vis-à-vis the European counterparts, a new three-year assistance package (2015–2018) was negotiated to provide a framework for addressing the main challenges of the Greek economy and bringing it to a sustainable path. The aim was to establish a basis for sustainable recovery by restoring fiscal sustainability and safeguarding financial stability along with reforms conducive to growth, competitiveness and investment, and modernising the public sector. Annex 1.1 depicts an overview of the financing provided to Greece. Main objectives of the three financial assistance programmes provided according to the relevant Memoranda of Understanding (MoU) Table 1.1 Main objectives of the three financial assistance programmes provided according to the relevant Memoranda of Understanding (MoU) Programme Objective Short-term: restore confidence and maintain financial stability. Medium-term: improve competitiveness and alter the First programme (Greek Loan Facility) economy’s structure towards a more investment- and export-led growth model. Place Greek public finances and economy back on sustainable Second programme (EFSF) footing and thereby safeguard Greek and euro area financial stability. Provide a strategy to restore sustainable growth, create jobs, reduce inequalities, and address the risks to Greek and euro Third programme (ESM) area financial stability. The strategy was designed to accommodate the need for social justice and fairness, across and within generations. Institutional context The institutional framework governing euro area financial support to Greece has evolved significantly over the three programmes. At the eruption of the global financial crisis preceding the assistance to Greece, the institutional arrangements for euro area crisis resolution had not yet been established. Therefore, the first programme was supported by the Greek Loan Facility (GLF), an ad hoc bilateral loan arrangement by the euro area member states. The second and third programmes were supported by the EFSF and ESM, respectively. The EFSF was established as a temporary entity to financially support euro area member states in financial difficulties that threaten the financial stability of the euro area and its member states. Financial assistance was provided jointly with the International Monetary Fund (IMF) whenever possible. The EFSF’s role was technical and broadly limited to mobilising financing compatible with the member states’ debt sustainability and establishing the technical financing term.The ESM Treaty sets the ESM’s mandate as mobilisation of funding and provision of stability support under strict conditionality to the benefit of ESM Members that are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its member states. This has often been interpreted as enabling the Member to regain sustainable market access, but other, less explicit objectives, such as the integrity of the euro area, may have played a role as 6 | PROGRAMME EVALUATION II SPECIAL | JUNE 2 0 2 0 well. EFSF and ESM financial assistance is provided in a cooperative framework with the European Commission and the European Central Bank (ECB), and whenever possible in cooperation with the IMF. EFSF financial assistance was provided under the EFSF’s Framework Agreement, while ESM financial assistance was provided under the