Greek Debt Deal Reached but Opens Pandora’s Box (7/14)     Print

By James D. Spellman, Strategic Communications LLC

spellmanGreece and the European Union early Monday (July 13) reached agreement on measures that aim to keep Greece within the Eurozone through financial assistance, debt relief, and rigorous oversight but require the country to implement quickly reforms that its ruling government and the electorate resoundingly rejected as too onerous only a week ago.

Securing acceptance by the Greek parliament by July 15 (Wednesday) and quickly reopening Greece’s banks with a cash infusion from the European Central Bank are among the many uncertainties the acrimonious, 31-hour-long talks left unresolved as a €3.5 billion loan repayment to the ECB comes due July 20. (By the afternoon on July 13, the European Central Bank signaled that it would leave its credit line to Greece’s banks in place at its current level.)

Greek Prime Minister Alexis Tsipras said that after a "tough battle," Greece had secured debt restructuring and a "growth package." The "belief and the hope that... the possibility of 'Grexit' is in the past," he added. "The deal is difficult but we averted the pursuit to move state assets abroad. We averted the plan for a financial strangulation and for the collapse of the banking system." And, later: [W]e hope that putting Grexit to bed means inward investment can begin to flow, negating them.”

Minutes after his “u-turn,” there were tweets of relief and anger (the hashtag #ThisIsACoup has become one of the highest ranked twitter handles) as the likelihood of Greece’s ruling party Syriza (meaning “Coalition of the Radical Left”) retaining power through its coalition with the right-wing party ANEL (“Independent Greeks”) seemed in doubt amid the race for Greece’s Parliament to vote on the required reforms on July 15 (Wednesday). An editorial on Syriza’s website and comments from the party’s left wingers, such as Labor Minister, Panos Skourletis suggested Tsipras’s narrow parliamentary majority was imploding. “Right now there is an issue of a governmental majority,” Skourletis said, “I cannot easily blame anyone who cannot say ‘yes’ to this deal.” Only 12 votes are needed to defeat Tsipras, assuming the opposition parties all vote “no.”

“The advantages far outweigh the disadvantages,” Angela Merkel, Germany’s Chancellor said in explaining why she recommends with “full conviction” that the German Parliament approve the agreement. “The country which we help has shown a willingness and readiness to carry out reforms.” Merkel, French President François Hollande, and European Council President Donald Tusk, the media reported, met with Tsipras in the final hours of negotiations to extract more concessions from Tsipras at Germany’s insistence.

Throughout the five months of bailout talks, Eurozone negotiators sought long-term austerity measures to ensure that Athens would quickly become capable of paying off debt and other bills so the country could remain a Eurozone member. Syriza won power in late January on its campaign pledge to force the Eurozone to reduce its austerity regime. It argued repeatedly with Brussels that the country needs debt forgiveness and restructuring to promote economic growth.

In what the Financial Times called “the most intrusive economic supervision programme ever mounted in the EU,” the new package includes:

Fiscal reforms by July 15: streamlining and broadening the VAT base (including restaurant bills, for example); measures that improve the “long-term sustainability” of the pension system by extending retirement age and cutting benefits; adherence to creditor-imposed surplus targets with “quasi-automatic” spending cuts; and protecting the government’s statistics department from political influence.

Legal reforms by July 22: an overhaul of the civil justice system; and, implementing an EU directive on winding up failed banks into national law.

Emergency loans for Greek banks: ECB would continue or increase its €89 billion in emergency loans backed by €10 billion in guarantees from Eurozone governments through the European Stability Mechanism. This is contingent on Greece’s implementation of the reforms above and repayment of debts to the ECB and the IMF.

Three-year assistance program: reportedly €82 billion to €86 billion more — $91 billion to $96 billion — to strengthen Greece’s economy, recapitalize the banks, and meet debt obligations over the next three years, the terms to be negotiated, only after Athens implements a list of reforms. The Euro Summit envisions releasing €7 billion by July 20 and €5 billion by mid-August.

Debt restructuring: European leaders pledged to hold discussions on restructuring Greek debts, but eliminated from those discussions “haircuts,” or slicing off a portion of all debt owed. Merkel ruled out both lowering interest rates and delaying repayments, seeing those as a debt write-offs of debt, but suggesting that an extension in the maturity of the Greek loans was a possibility.

Privatization fund: money from the privatization of state-owned enterprises (for example, planes, airports, infrastructure, banks, and the energy transmission operator ADMIE), estimated by officials to be €50 billion (apparently based on an IMF projection in 2011), would be pooled into an Athens-based (Tsipras saw this as a victory since Eurozone officials were insisted the fund be based in Luxembourg) fund that would repay creditors and reinvest in the Greek economy.

Long-term market liberalization: liberalization of the labor market, relaxation of Sunday trading laws, and deregulation of bakers and milk producers, among others.

Supervisory regime: the International Monetary Fund (provide continued IMF support through March 2016) and EU officials would oversee the domestic economic initiatives and government reforms.

Modernizing the economy: Greece has been told to adopt EU directives and best practices (those of the Organization for Economic Cooperation and Development) for its labor markets, including collective bargaining procedures, strengthen its financial sector, including taking “decisive action on non-performing loans” and eliminating political interference.

Markets climbed in what some analysts called a “relief rally” but the “execution risks” continued to worry investors. At the close, the FTSE 100 had climbed 0.97%, or 64.57 points, to end at 6,737.95. France's CAC-40 closed ahead 1.94% at 4,998.10 while Germany's Dax ended up 1.49% at 11,484.38. The euro, though, fell against the dollar by 1.1 percent. In early trading, U.S. stock markets edged higher.