Armageddon averted, but country faces deepening recession and social unrest
After an exhaustive 17-hour session which started last Sunday evening only to conclude late on Monday morning, the Eurozone heads of state conclave worked out yet another gigantic bailout deal - the third since 2010 - to help stave off complete bankruptcy in Greece and keep the country afloat as an integral part of the Eurozone.
What became most abundantly clear during this arduous and never-ending all night session was the determination of a small but persistent group of eurozone government officials from the north and central European countries who most definitely wanted Greece kicked out of the eurozone block on political, ethical and financial grounds. This would have been an unprecedented action forced upon the other Eurozone members with the argument that Greece’s continuing presence in the Eurozone was detrimental to the European project because of its problematic and deficit prone finances, and recalcitrant nature.
Greece, by systematically avoiding any kind of public policy reform, was undermining Eurozone’s credibility and presented a bad example to other countries and therefore had to be expelled. The euro’s slide against the dollar over the last six months also was a strong case in point, never mind the fact that a cheaper euro was helping boost European exports.
Without doubt the terms agreed in this latest bailout deal are extremely harsh but could not be different given Alexis Tsipras’s far left government’s five month socialist experimentation and open defiance of European norms, during which time the economy went into an uncontrolled downward spiral culminating in capital controls, an indefinite bank holiday, suspension of trading on the Athens Stock Exchange, thousands of job losses and mounting bankruptcies.
Although the foundations of a new bailout deal for Greece were agreed in Brussels on July 13, tough negotiations still lie ahead to end its financial crisis. At a news conference, EU President Donald Tusk described the agreement as an “aGreekment” but as he said there was clearly a lack of trust on the creditor side, with German chancellor Angela Merkel among those saying the relationship had to be “rebuilt” following months of tortuous talks. She added that future funding was conditional on the continued involvement of the International Monetary Fund - a scenario Greece had tried hard to block.
Many Greeks reacted furiously to the deal, particularly Germany’s role in insisting on continued austerity in return for help. Crucially, the package will not result in an immediate cash injection for the country’s cash-starved banks which remain closed, but it was understood that the possibility of a bridging loan will be discussed later this week. The European Central Bank did nothing on Monday to ease the squeeze on bank cash - with withdrawals still limited at 60 euros per day.
The plan agreed in Brussels includes the creation of a EUR 50 bln asset fund by Greece, based in Athens, which would be partly used to recapitalise the banks. Should the Greek parliament agree the fund and other reforms such as spending cuts, the prospect of a third bailout totaling EUR 86 bln over three years will be up for discussion. Prime Minister Tsipras said the negotiations had been a “tough battle” but he insisted he had managed to avert “the plan of a financial collapse and banking system collapse”.
Upon his return to Athens on Monday, Tsipras faced a rebellion within his own government after he accepted the most intrusive programme ever mounted by the EU in order to keep Greece in the eurozone. Inevitably, he will have to rely on opposition support to pass a swath of economic reform measures by Wednesday’s EU-imposed deadline, or face the country’s bankruptcy as a growing number of far-left MPs voiced strong opposition to the deal. The ruling Syriza party’s communist Left Platform, which controls almost 30 seats in parliament, called it a “humiliation of Greece”.
The leader of the Independent Greeks, the rightwing coalition partner, also said that his party could not agree to the accord, calling it a “coup by Germany” and its hardline eurozone allies, the Netherlands and Finland. But other Greek political leaders said that there was no danger for legislation not going through parliament because it had the wide support of mainstream opposition lawmakers, who would make up any government defections in the 300-member legislature.
The hard-fought agreement averted the gravest crisis facing the EU and its eurozone core, postponing, at least for the time being, Greece’s exit from the single currency and the chaos that could follow. Tsipras accepted plans for a high level of domestic economic supervision by the bailout monitors, something which he had wanted to avoid at all cost, including the IMF and a public administration overhaul overseen by the European Commission. Now, he must implement a list of demanding economic pledges, including a repositioning of the country’s value added tax system and sweeping pension reforms, by enacting legislation by July 15 as a condition for a formal start of negotiations later this week on a financing package to stave off bankruptcy.
Eurozone officials said that once Greece had taken steps to legislate reforms there would be an agreement that eurozone governments could “recommend with full conviction” to their parliaments. President Francois Hollande of France said: “At some point we thought we might lose a member of the eurozone, but Europe would have retreated; we needed to succeed.”
Meanwhile, the delay in reaching a deal prevented the European Central Bank from providing Greek banks with much needed extra emergency finance. But, following the announcement of the agreement, the ECB said it would maintain Greek banks’ EUR 89 bln emergency liquidity assistance (ELA) lifeline. That means that there will be no immediate relief for Greece’s ailing banking system with economic conditions worsening from day to day. The IMF, also, said late on Monday that Greece had missed a second payment, meaning it now needed to clear EUR 2 bln in arrears before the institution could lend to Athens again.
Investors welcomed the accord, pushing stocks in Europe up by almost 2%, but there was no euphoria, reflecting the political obstacles that still lie ahead — not least in Athens. Sovereign debt markets initially rallied before cooling later in the day.
With trust, concerning Greece’s position in Europe and its financial and commercial dealings in general, seriously undermined following this latest crisis, the reputation of Greek companies is equally tarnished, and will therefore make it extremely difficult for them to compete in the international arena. The amount and effort needed to continue operating, let alone grow, in a highly competitive global environment, given the restrictions and financial burdens that will be imposed on them through this latest bailout programme, will simply be huge and it remains to be seen how many will actually survive.
Greece’s position in the eurozone may for the moment appear secure, although fragile, but uncertainty as to the recessionary economic conditions that will inevitably result is extremely high with the country most likely to face soon a huge wave of social unrest. Economic growth will apparently remain a distant mirage for the foreseeable future, with pundits forecasting Greece’s slow and agonising death within the euro.