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11/12/2016

Eurozone okays Greek bailout, wooing IMF on debt

Euro & Finance

Eurozone okays Greek bailout, wooing IMF on debt

Jeroen Dijsselbloem, President of the Eurogroup (L) shakes hands with Euclid Tsakalotos, Greek minister of finance.

[Reuters]

Eurozone finance ministers agreed on Friday to lend Greece up to €86 billion in return for an unprecedented package of reforms that Athens had previously rejected and which has divided Prime Minister Alexis Tsipras and his party.

Assuming approval by the German and other parliaments, €13 billion should be in Athens next Thursday to pay pressing bills and a further 10 billion will be set aside at the European Stability Mechanism, earmarked to bolster Greek banks’ capital.

In all, the eurozone will lend €26 billion in a first tranche of the bailout before reviewing Greece’s compliance with their conditions in October.

Dutch Finance Minister Jeroen Dijsselbloem, who chaired the Eurogoup meeting, said ministers “welcomed the wide scope of policy measures (in the accord) which if implemented with determination will address the main challenges facing the Greek economy”.

“We are confident that decisive and swift as possible implementation … will allow the Greek economy to return to a sustainable growth path based on sound public finances, enhanced competitiveness, high employment and financial stability,” he added.

Under the programme, Greece will have to balance its books to produce a primary budget surplus — that is, before interest payments — and take on a major privatisation programme to help reduce a debt mountain of some €320 billionn. The sale of state assets should produce more than €6.0 billion in the three years but the ultimate target is €50 billion, to help pay to recapitalise the banking system and reduce the debt.

A tired Euclid Tsakalotos, the Greek finance minister, emerged from Friday’s meeting saying it was now up to his compatriots to forge ahead. “Let’s hope that the Greek people will be able to make the best of this deal, to make (the) best of the reforms and the ability to reform and mitigate any negative consequences that surely exist within it,” Tsakalotos said in a statement.

Dijsselbloem recognised that dealing with the debt was among the most important issues, especially for the International Monetary Fund which believes Greece cannot get back on its feet without some relief.

Schaeuble’s cautious optimism

Even Germany’s Wolfgang Schaeuble, who last month floated a Greek exit from the euro as Tsipras hesitated to agree terms with fellow leaders, sounded upbeat, if still wary of a new tone in Athens that caused an angry split in Tsipras’ leftist party, with nearly a third of Syriza lawmakers rebelling in parliament.

>>Read: Eurozone ministers to decide on third Greek bailout deal

“We will have to wait and see,” said Schaeuble, who has become a hate-figure for rigid austerity among Greeks tired of five years of soaring unemployment. “This is an opportunity. But what is decisive is that Greece does what it says it will do.”

Schaeuble was among numerous ministers who stressed they saw it as vital that the IMF take part in the third bailout, as it has in two programmes totalling €240 billion since 2010.

Role of the IMF in limbo

One remaining uncertainty – aside from Tsipras’ ability to deliver sweeping budget cuts and privatisations opposed by many of his own party – is the role of the International Monetary Fund. After backing two previous bailouts, the IMF renewed its call for the Europeans to grant Athens debt relief – a bone of contention between the Eurogroup and the Washington-based Fund.

Managing Director Christine Lagarde told the Eurogroup by telephone that she could not commit until the IMF board reviewed the situation in the autumn. Officials said the Fund needed more assurances and detail on Greek reforms, notably to pensions, and steps to persuade it that Greece’s debt burden was sustainable.

Not only would IMF lending reduce the amount needed from Europe – possibly by a sum similar to the €16 billion the Fund had ready when the second bailout programme expired – but the IMF’s reputation for rigour would reassure sceptical parliaments and financial markets that conditions would be met.

“I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own,” she said.

Led by Germany, eurozone governments have ruled out taking a “haircut” to reduce the nominal principle of Greece’s debts to them. But the Eurogroup said in its statement that it would consider longer grace periods and repayment periods if Greece successfully met its loan conditions by an October review.

Dijsselbloem said it was still unclear that Greece could not afford to service its debts but he was optimistic differences with the IMF could be overcome. French Finance Minister Michel Sapin, among strong supporters of helping Greece stay in the euro zone, said that a consensus was emerging on the Greek debt.

Critics of past bailouts argue they can create a downward spiral as governments pump money out of the country to service foreign loans, choking domestic economic activity that generates the tax revenues the state needs to pay its debts. EU officials argue that Greece is borrowing already on very favourable terms.

Democratic bailout?

At the end of the day, Greece’s international creditors will have an unprecedented say over the country’s government to make sure Athens sticks to the terms of its huge third bailout.

The new bailout is even more far-reaching, with a long list of do’s and dont’s as the creditors aim to leave no wriggle room for Athens. They go far beyond economic management to include extensive reforms of the country’s health and social welfare systems, and modernising and de-politicising the public administration.

Seemingly small details of daily life will be affected by the new rules, with creditors wanting to force bakeries to set bread prices by the kilo rather than the loaf, and extend the expiry dates of pasteurised milk in the supermarkets. The government will also have to bring the education system into line with “best EU practices”, the standard set for many of Athens’ new obligations, which include cleaning up the banks, a new privatisation drive and opening closed professions.

Many of these commitments must be put into law before cash can be handed over. The creditors will conduct regular reviews, the first due in October, to ensure the reforms are being fully implemented.

Analysts say this close oversight raises other questions about the feasibility of the bailout — especially in terms of whether its rollout is seen as democratic.

“The problem of democratic legitimacy should not be underestimated, neither for Greece nor for the lenders,” Daniela Schwarzer of the German Marshall Fund of the United States told AFP. “This is true in Greece as a recipient country which is subject to ever tighter controls and where critics have long observed a loss of sovereignty,” she said.

“For the lenders, likewise problems of legitimacy arise, as it is getting harder and harder to explain to taxpayers that they should continue to provide liquidity aid to a country which has been identified as insolvent.”

Revolt in Athens

After debating through the night, the Greek parliament gave its backing to Tsipras’ plans to legislate what creditors want, though he had to rely on opposition votes after nearly a third of his own supporters rebelled, forcing him to consider a confidence vote that could pave the way for early elections.

Defeating conservatives in January, Tsipras remains hugely popular for standing up to Germany and he would be expected to win again, given an opposition in disarray.

A hardline faction in his party effectively gave notice it might break away, raising the prospect of Tsipras having to build a new, possibly unstable, coalition.

That could mean further uncertainty in Greece and in a wider eurozone economy which data on Friday showed still struggling to meet even modest growth expectations.

EU leaders say new measures to consolidate the euro zone mean threats to its survival are much weaker than when it first was hit by the global debt crisis. But German-inspired fiscal rigour despite continued high unemployment, especially among the young, continues to fuel opposition to European integration.

Nonetheless, Tsipras defended his abandonment of election promises he made to austerity: “I do not regret my decision to compromise,” he told the parliament in Athens. “We undertook the responsibility to stay alive over choosing suicide.”

Positions

Commission head Jean-Claude Juncker said six months of negotiations with the left-wing government of Prime Minister Alexis Tsipras -- who won office in January opposed to the creditors' demands -- had been difficult and testing.

"Together, we have looked into the abyss. But today, I am glad to say that all sides have respected their commitments. Greece is living up to its ambitious reform commitments," Juncker said in a statement.

"The message of today's (meeting) is loud and clear: on this basis, Greece is and will irreversibly remain a member of the euro area."

GUE/NGL President Gabi Zimmer said that although Greece gets more breathing space, the bailout by no means represents a way out of the crisis.

"€26 billion will be provided initially, mainly to service debts and to save banks and allow them to operate. A haircut has been excluded. More installments will be paid in stages when harsh reforms are rigorously implemented. With a privatization fund like the German Treuhand trust and collective redundancies, Greece won't exit the crisis," she said.

“The Greek parliament has already approved these reforms. The Greeks have met their obligations. The creditors however, are still hesitating and have postponed the key question of debt sustainability until October, because only then will the IMF decide whether it will participate or not. Schäuble, who declared at the last minute that he would not block an agreement, has nevertheless significantly dictated the conditions of the bailout. It must be clearly stated that the entire German coalition government has to take joint responsibility for this," she added.

Background

Greece and its international lenders reached an €85 billion bailout agreement on 11 August after nailing down the terms of new loans needed to save the country from financial ruin.

The deal, which came after 23 hours of talks that continued through the night, must still be adopted by Greece's parliament and by euro zone countries.

When creditors agreed in July to negotiate a deal aimed at keeping it afloat and in the euro zone, Greece committed to implementing major reforms, such as scrapping early retirement, by the end of October. Lenders demanded, for example, an increase in the retirement age to 67 from the nominal 62 that falls significantly depending on the number of years worked and family status.