Greece debt crisis analysis: Everything you need to know about the Greek austerity deal

After 17 hours of negotiations a unanimous deal was finally reached in Brussels

Ben Chu@Benchu_
Tuesday 14 July 2015 10:08
Greek Prime Minister Alexis Tsipras speaks with the media after a meeting of eurozone heads of state at the EU Council building in Brussels
Greek Prime Minister Alexis Tsipras speaks with the media after a meeting of eurozone heads of state at the EU Council building in Brussels

The bailout

What was agreed was not the next Greek bailout, merely a deal to begin talks about it. But ministers and officials did sketch out what that bailout will look like. Greece will receive between €82bn (£58bn) and €86bn in funding to cover its financing needs over the next three years, and to recapitalise its banks. This will come from the European Stability Mechanism bailout fund and (probably) the International Monetary Fund. This new bailout will be on top of the €240bn of assistance that has already been committed by Europe and the IMF to keeping Greece afloat since 2010.

The legislation

Greece has been told that it must pass a series of laws by the end of Wednesday, such as raising VAT rates and cutting pensions. These are known as “prior actions” because European politicians will not restart negotiations without them.

Opposition parties in Greece yesterday came out in support of the agreement, meaning that Alexis Tsipras should be able to get the laws through the Greek parliament. However Mr Tsipras’s Syriza party is expected to split over the issue, with some hard-left MPs likely to vote against the new laws. There have also been rumours that Mr Tsipras will pass the laws and then call a snap election. That could end in a more centrist coalition and he will not need to worry so much about the views of Syriza’s left wing.

The assets

One of the most contentious aspects of the agreement was that Greece will have to put €50bn worth of state assets – ports, utility companies etc – under the control of a special arms-length privatisation fund. The fund will be partially overseen by the European Commission and the sale proceeds will supposedly be used to fund the Greek banks’ recapitalisation and to pay down the country’s debt. Germany had originally proposed that this fund be run from Luxembourg by a German state bank, prompting accusations on social media of a German “coup”.

Yet the €50bn valuation is outlandishly high. The IMF estimated last month that Greece’s saleable state assets were worth around half that – and that the proceeds from future privatisations are only likely to be €500m a year. At that rate the €50bn would not be reached for 100 years. Rather than a coup, the fund is more like a face-saving measure by Germany, designed to give the impression to German voters that the Greeks will pay for their own bailout.

The victory

Mr Tsipras has had to reverse his position dramatically. The economic reform commitments are almost identical to those he campaigned against in the referendum. Even more damagingly, the deal calls upon him to sack many of the public sector workers rehired after Syriza came to power – effectively forcing him to break his campaign commitments.

On the other hand, Athens can point to a written commitment from its creditors to look at Greek debt relief for the first time. And the fact remains that Germany will inevitably bear the lion’s share of the exposure from the new bailout. Berlin’s additional exposure lies between €17bn and €23bn. By the way, if the IMF participates in the same manner as it has in previous programmes the UK would be (nominally) on the hook for another €1.3bn of lending to Greece.

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