Eurozone leaders and finance ministers finally struck an agreement on Monday morning after non-stop talks lasting 17 hours over the weekend. There were concerns after Sunday’s full EU summit was cancelled because the Eurogroup meeting overran but Eurozone leaders did meet in the evening to push for a deal at an all-night summit.
Greece’s latest proposals were initially met positively by the Eurogroup but optimism turned to pessimism after some Eurozone members, notably Germany, Finland and Slovakia, expressed strong doubt whether the Greek government can be trusted to implement all the required reforms. The German finance minister even proposed that Greece be temporarily suspended from the euro to allow it to reform and restructure its debts but the idea got little backing.
The main component of the deal is that Greece needs to approve a number of measures by July 15 as a pre-condition for the bailout talks to officially open. The measures include passing important reforms for VAT and pensions, automatic implementation of spending cuts and providing legal independence to Greece’s statistics agency ELSTAT. In addition, the Greek parliament needs to initiate action on a number of other points such as the privatization of the electricity grid and dealing with non-performing loans.
The new bailout is thought to amount to €86 billion over a three-year period. A main sticking point of the deal was a request to setup an independent fund of €50 billion, which will be funded from privatization proceeds. Germany wanted the fund to be managed by its own national development bank but this was opposed by Greek prime minister Alexis Tsipras who negotiated for the fund to be managed in Athens.
The fund will contribute to the recapitalization of Greek banks of up to €25 billion and €2.5 billion will be used for direct investments. About €12.5 billion will be used to pay-off debt to reduce the national debt burden. Any remaining amount will be used to promote growth, in addition to a €35 billion growth package agreed as part of the bailout.
The Greek prime minister’s biggest success in the negotiations was securing a possible extension to the maturities of Greek debt, though this is conditional on the full implementation of the agreed reforms. He was however unable to exclude the IMF’s participation in the latest bailout, which has been one of the demands of the Syriza party from the onset.
Having agreed to the creditors’ tough terms, Alexis Tsipras’ next big task will be to get the Greek parliament, as well as hardliners in his own party, to approve both the bailout and the set of pre-conditions before the July 15 deadline in order to secure bridge financing. Without the bridge financing, Greece will be unable to meet its debt repayments over the summer including €7 billion due to the European Central Bank on July 20.
Approval of the terms by the Greek parliament is also required for the ECB not to cut off support to Greek banks. The ECB is expected to maintain emergency liquidity at current levels when it meets later today but is unlikely to raise the cap on ELA without a political agreement.
The euro opened 0.5% lower against the dollar but jumped to 1.1195 when a deal was announced. However, profit takers soon moved in and took the single currency to a low of 1.1053 before recovering slightly to 1.1077.
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