A Grexit is averted… for now at least
Greek Prime Minister Alexis Tsipras came under intense pressure on Sunday to bend to the will of European creditors. After marathon negotiations, a bailout deal was finally reached. But the Mediterranean nation will be required to surrender to creditors’ demands and then have them ratified by the Greek parliament by Wednesday at the latest.
Eurozone finance ministers placed Greece under tremendous pressure, and a proposal was floated to allow Greece a timeout if no deal could be hammered out. Eurozone nations remained sharply divided in how they were approaching the possibility of a Grexit.
As it stands, nine countries are receptive to a Greek exit: Finland, Latvia, Lithuania, Malta, Slovakia, Austria, Germany, Belgium and the Netherlands. Five countries are uncertain, but would prefer to avoid a Grexit: Ireland, Portugal, Estonia, Slovenia and Cyprus. The four countries that do not want Greece to exit the eurozone include Spain, Italy, France and Luxembourg.
French President Hollande was thrilled that a Grexit was avoided, calling the potential loss of Greece, ‘losing the heart of our civilisation’. Conversely, the country most receptive to a Grexit is Germany. While shouldering most of the burden of the Greek debt, Germany has no desire to relax repayment terms and conditions, or forgive Greece’s debt obligations to the International Monetary Fund (IMF), the European Commission (EC) or the European Central Bank (ECB).
A proposal was floated by eurozone member countries that Greece surrenders over €50 billion of state assets. As expected, the Greeks rejected this proposal. The alternative presented to Greece in the absence of an agreement was a euro timeout. According to the proposal, the Greek banking sector requires between €10 billion and €25 billion to address the banks’ recapitalisation requirements. The eurozone was prepared to offer €10 billion immediately via a segregated account.
Prior to the agreement being reached, the Greek authorities were being pressured into accepting a privatisation programme with significantly enhanced governance. The €50 billion of Greek assets were to be used to decrease the country’s debt, and to be transferred to the Institution for Growth, which is located in Luxembourg. The full privatisation of these assets would be undertaken to repay the country’s financial obligations.
So intense were the negotiations between Greece and its creditors that officials described what the Greek Prime Minister was undergoing as mental waterboarding. The options available to Greece were rather limited in the run-up to the agreement. Greece could become a ward of the eurozone, or could depart from the common currency area and watch financial ruin take root. Fortunately, neither option was adopted and Greece received its third bailout deal in five years.
Political implications of a bailout deal for Greece
The far-left Syriza Party is likely to be reshuffled, as those against the bailout terms are replaced by those in favour of meeting the eurozone creditors’ demands. The about-turn enacted by Prime Minister Tsipras has caused a major rift in relations with supporters and within his own party. The agreement being floated by the Troika will likely not pass the 300-seat House in Athens. The problem is not only financial, it is ideological too. Now that Prime Minister Tsipras has agreed to the concessions, he may be forced to call early elections.
Failure to reach agreement would certainly have resulted in a sudden and dramatic banking collapse in Greece. This would have forced the country out of the eurozone and into uncharted territory. Confidence in the euro was severely tested and high short-term volatility would have ensued with a basket of currencies across the board. A Grexit would also signify the first major European divergence in over six decades. But, as it stands, the euro rallied and confidence was restored. Tsipras also avoided having to transfer Greek assets over to the EU.
The pyrrhic victory recorded by Tsipras in the 5 July referendum has underscored his government’s opposition to Troika demands, but it did little to force Europe to bend to Greece’s will. Prior to reaching an agreement, Europe was not interested in writing down Greek debt and only considered decreasing the interest rate to ease the burden. As the negotiations continued into the early hours, Greece requested ever-increasing financing to stay solvent. The three-year aid package started at €53.5 billion, but grew larger as the tense negotiations dragged on. As it stands, Greek debt is now at €320 billion and growing.
For currency traders, it is clear that the euro bulls have chased the bears back into the caves. And for the common currency area, a collective sigh of relief has been breathed following the marathon negotiations and final agreement. That the euro has rallied against a basket of currencies is indeed a reason to celebrate. Fortunately, the ECB has a wide range of tools to stem a wider currency crisis. The euro spiked shortly after an agreement was struck and is now trading around $1.1067.
The situation as it stands now
Greece has until Wednesday 15 July to vote through the measures required by creditors. And six national parliaments across Europe will also be required to vote on the bailout package offered to Greece. Failing approval, Greece will be offered a temporary exit from the EU.
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