Thursday, July 09, 2015

A last-minute deal to resolve the EU-Greek crisis?

It looks as though there will be a last-minute political deal, which Tsipras will now have to push through the Greek parliament.  (I suspect that may require votes from non-Syriza parties to make up for defections from the governing coalition.)  What this deal actually means will depend on the details ... which I presume will become clearer soon.

—Jeff Weintraub

Thursday, July 9, 2015 - 14.39 EDT
Greece debt crisis: Athens accepts harsh austerity as bailout deal nears
Greek cabinet reportedly backs a package of reforms and spending cuts worth €13bn to secure third bailout and modest debt writeoff

By Phillip Inman, Graeme Wearden, & Helena Smith

The Greek government capitulated on Thursday to demands from its creditors for severe austerity measures in return for a modest debt write-off, raising hopes that a rescue deal could be signed at an emergency meeting of EU leaders on Sunday.

Athens is understood to have put forward a package of reforms and public spending cuts worth €13bn (£9.3bn) to secure a third bailout from creditors that could raise $50bn and allow it to stay inside the currency union.

A cabinet meeting signed off the reform package after ministers agreed that the dire state of the economy and the debilitating closure of the country’s banks meant it had no option but to agree to almost all the creditors terms.

Parliament is expected to endorse the package after a frantic few days of negotiation that followed a landmark referendum last Sunday in which Greek voters backed the radical leftist Syriza government’s call for debt relief.

Syriza, which is in coalition with the rightwing populist Independent party, is expected to meet huge opposition from within its own ranks and from trade unions and youth groups that viewed the referendum as a vote against any austerity.

Panagiotis Lafazanis, the energy minister and influential hard-leftist, who on Wednesday welcomed a deal for a new €2bn gas pipeline from Russia, has ruled out a new tough austerity package.

Lafazanis represents around 70 Syriza MPs who have previously taken a hard line against further austerity measures and could yet wreck any top-level agreement.

Emphasising the likelihood of further strife in Greece next week even should a deal be concluded, Brussels officials talked privately of plans to fly in humanitarian aid such as food parcels and medicines to major cities.

The urgency of Greek efforts to prevent an exit from the euro came after Brussels set a midnight Thursday deadline for Greece to produce a package of measures in line with previous demands.

With the support of officials from the French finance ministry, Greek negotiators are believed to have accepted the need for VAT rises and rules blocking early retirement as the price of a deal.

Several EU leaders said the troika of creditors – the European commission, the International Monetary Fund and the European Central Bank - must also make concessions to secure Greece’s future inside the eurozone.

Donald Tusk, who chairs the EU summits, said European officials would make an effort to address Greece’s key request for a debt write-off.

“The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors. Only then will we have a win-win situation,” Tusk said.

Tusk, a former prime minister of Poland, aligned himself with France and Italy in seeking a way through the political maze that has defeated all previous efforts to find a breakthrough.

Sources close to Greece’s chief negotiator and finance minister, Euclid Tsakalotos, said he had finalised and submitted a plan of reforms for a third bailout to give creditors time to review it ahead of a summit of EU members on Sunday.

On Thursday, the German finance minister, Wolfgang Schäuble said the possibility of some kind of debt relief would be discussed over coming days, although he cautioned it may not provide much help.

“The room for manoeuvre through debt reprofiling or restructuring is very small,” he said.

Greece has long argued its debt is too high to be paid back and that the country requires some form of debt relief. The IMF agrees, but key European states such as Germany have resisted the idea.

Making Greece’s debt more sustainable would likely involve lowering the interest rates and extending the repayment dates on its bailout loans. Germany and many other European countries rule out an outright debt cut, arguing it would be illegal under European treaties.

The developments on Thursday boosted market confidence that a compromise will be found. The Stoxx 50 index of top European shares was up 2.4% in late afternoon trading.

Prime Minister Alexis Tsipras met with finance ministry officials ahead of the cabinet meeting on Thursday afternoon which finalised his country’s plan, a day after his government requested a new three-year aid programme from Europe’s bailout fund and promised to immediately enact reforms.

The last-minute negotiations come as Greece’s financial system teeters on the brink of collapse. It has imposed restrictions on banking transactions since 29 June, limiting cash withdrawals to €60 per day to staunch a bank run. Banks and the stock market have been shut for just as long.

The closures, which have been extended until Monday, have led to daily lines at cash machines and have hammered businesses. Payments abroad have been banned without special permission.

Greece’s financial institutions have been kept afloat so far by emergency liquidity assistance from the ECB. But the central bank has not increased the amount in days, giving the lenders a stranglehold despite capital controls.

German ECB governing council member Jens Weidmann argued Greek banks should not get more emergency credit from the central bank unless a bailout deal is struck. He said it was up to eurozone governments and Greek leaders themselves to rescue Greece.

The central bank “has no mandate to safeguard the solvency of banks and governments,” he said in a speech.

The ECB capped emergency credit to Greek banks amid doubt over whether the country will win further rescue loans from other countries. The banks closed and limited cash withdrawals because they had no other way to replace deposits.

Weidmann said he welcomed the fact that central bank credit “is no longer being used to finance capital flight caused by the Greek government”.