The Greek Debt Crisis – Latest Developments

After a weekend of marathon negotiations at an emergency Eurozone summit in Brussels, Greece’s creditors—the International Monetary Fund (IMF), the European Central Bank (ECB), and various Eurozone countries—have given the country an ultimatum: enact a laundry list of economic reforms by July 15 in order to start formal negotiations on the country’s third financing package in five years, or face expulsion from the nineteen-member currency union. Although Greek Prime Minister Alexis Tsipras has pledged to push the requisite reforms through his country’s Parliament, he will likely face stiff—and potentially destabilizing—opposition from his own far-left Syriza party.

What You Need to Know About the New Proposal

The creditors’ demands are part of a new list of prior actions assembled by the Eurogroup of Eurozone finance ministers over the weekend, building on a proposal submitted July 10 by the Greek government. In exchange for €86 billion in new bailout funding over the next three years, the revised agreement demands even harsher austerity than what Greeks voted to reject in a July 5 referendum.

Citing a lack of trust between Greece and its negotiating partners, the Euro Summit statement conditions the beginning of negotiations on any future bailout program from the Eurozone’s emergency fund—the European Stability Mechanism (ESM)—on a list of reforms to be enacted by the Greek Parliament by July 15, which include:

  • Streamlining of the Value-Added Tax (VAT) system;
  •  Broadening the tax base;
  • Upfront measures to improve long-term sustainability of the pension system;
  • Safeguarding the legal independence of ELSTAT, the Hellenic Statistical Authority; and
  • Introducing quasi-automatic spending cuts when primary surplus targets are not met.

The statement also calls on the Greek government to strengthen its reform measures in a number of key areas by:

  • Carrying out ambitious pension, product market, and labor market reforms;
  • Scaling up its privatization program by transferring €50 billion of valuable Greek assets to an independent fund based in Athens and managed by Greek authorities—under the supervision of relevant European institutions—to help fund debt repayment;
  • Amending legislation that the Tsipras government adopted without the consent of the European institutions, which rolled back various spending cuts agreed to under the framework of the February 20, 2015, Eurogroup statement.

In a significant departure from previous proposals, the Euro Summit text mentions the possibility of restructuring Greece’s debt in concert with the IMF. In so far as Greece fully implements the Eurogroup’s list of prior actions, the body stands ready to consider “additional measures aiming at ensuring that gross financing needs remain at a sustainable level,” through longer grace periods and maturities on Greek government bonds. However, discussions with the IMF about further debt restructuring are unlikely to begin until early 2016, given that the Fund’s current bailout program expires in March of that year.

What Tsipras Got in Return

Despite accepting a host of new demands, particularly on “red line” issues such as pension reform and labor market liberalization, Tsipras managed to secure a few important concessions in return, such as:

  • Stronger assurances of future debt relief, contingent on full implementation of prior actions;
  • An agreement to establish a new investment fund—to manage and sell off €50 billion of Greek assets—in Athens instead of Luxembourg; and
  • The removal of a clause that would have forced Greece to temporarily exit the Euro area for five years should it have failed to reach an agreement with its creditors.

Political Upheaval on the Horizon in Greece

Facing stiff opposition from several MPs in his governing coalition, Tsipras will have to rely on support from opposition parties and even reshuffle his Cabinet in order to push the necessary reforms through the Greek Parliament.

Since returning to Athens from Brussels, Tsipras has held a number of emergency meetings with top government officials—including Finance Minister Euclid Tsakalotos and Nikos Filis, Syriza’s spokesman on parliamentary issues—to decide on how to deal with party dissidents who have rejected the proposal from the Euro Summit.

Even if the Greek Parliament votes to implement the preconditions demanded by creditors, Tsipras may have to call an early round of elections sometime in the fall, having failed to deliver on his anti-austerity mandate.

Capital Controls to Remain in Place

On July 13, following the weekend’s Euro Summit, the ECB’s Governing Council announced that it would maintain its emergency liquidity assistance (ELA) program to Greece at €89 billion. With Greece’s banking system running nearly on empty after months of frantic withdrawals, the ECB’s decision means that the capital controls and bank holiday that have been in effect since June 29 will remain in place for the next week.

Demetrios Papageorgiou is an intern with the Global Business and Economics Program.

Image: Greek Prime Minister Alexis Tsipras with French President Francois Hollande (European Council President/Flickr Commons)