Greece and creditors return to the bargaining table. Now what?
With the Greek parliament passing the final round of austerity measures to launch talks on a new €86bn bailout, representatives of the country’s bailout monitors will return to Athens on Friday for the first time in months to begin the final slog towards agreeing a deal.
A look at what lies ahead:
When will a deal be agreed?
Pierre Moscovici, the European Commissioner in charge of economic issues, has said Brussels is shooting for a new agreement by “the second fortnight of August”. But there is a much more specific date that needs to be watched: August 20.
That is when the second of two big bonds held by the European Central Bank must be repaid. The first €3.5bn bond, which was due July 20, drove last week’s deal; this second one, for €3.2bn, will be the driving force behind the new negotiations. If Greece defaults on the ECB, it would likely be forced to cut off the emergency central bank loans currently keeping Greece’s financial system alive.
Some officials are sceptical that negotiations on a new three-year programme – something that normally takes months – can be wrapped up in a matter of weeks. But one eurozone diplomat said officials are eyeing August 11 as a potential date for a meeting of eurozone finance ministers to finalise a deal.
If none is reached in time for the August 20 payment, EU leaders are expected to do what they did for the July 20 payment: provide a bridge loan from a previously mothballed EU rescue fund, known as the European Financial Stability Mechanism. The EFSM has already lent Athens €7bn, and there is €6bn left in the fund.
What is likely to be at issue?
For most of the past two months, negotiators have focused on two contentious issues: simplifying Greece’s confusing value added tax system and overhauling its pension scheme. The measures passed by the Greek parliament over the past week were intended to move these reform measures into law.
The talks will now expand to include two areas where creditors think there is significant room for liberalisation in the Greek economy: labour laws and restrictions in the product market.
Liberalising Greece’s labour laws could be particularly tricky, given that the far-left Syriza party that governs Greece has resisted efforts to weaken the country’s collective bargaining rules and ran on a pledge to roll back laws that permit large-scale layoffs.
In last week’s summit deal, Athens promised a “modernisation of collective bargaining” and to adopt laws on “collective dismissals” that are in line with EU norms. What that actually means when it comes to specific measures remains to be negotiated.
The agreement also calls for opening up milk and bread sales to competition and allowing more entries into the so-called “closed professions” – including the politically sensitive area of ferry transport.
Where will the money come from?
This is another issue that must still be worked out. Although the rescue currently has a headline figure of €86bn, Klaus Regling, head of the eurozone’s €500bn bailout fund, has said his staff is only preparing a bailout loan of “perhaps €50bn”.
That leaves three potential sources for the remainder: the International Monetary Fund, the private markets and Greece itself. All three present problems.
The IMF has made clear that it will not distribute any cash remaining in its portion of the bailout – about €16.5bn of the original €28bn in its second programme – unless there is first a significant restructuring of Greece’s current debt, most of which is held by eurozone governments.
A Berlin-led group of governments has fiercely resisted any such move. Meanwhile, the European Commission has said that because Greece defaulted on the IMF, the fund may wait “an extended period” before it allows any more money to go to Athens.
Without the IMF, there are only two other sources to fill the gap: the private bond market, which had purchased Greek debt as recently as last year but has since been spooked by the Syriza government, and Athens itself.
Greece has in the past year posted a primary budget surplus – revenues minus expenses when debt interest payments are not included – that could be used to fill financing gaps. But officials now believe the economic chaos of the past three weeks has wiped away any chance of Athens posting a surplus this year or next.
There is also Greece’s star-crossed privatisation scheme. It was once forecast to raise €50bn in short order, but expectations have been drastically scaled back. The European Commission has suggested it could raise €2.5bn in the next three years.
What about debt relief?
The highly-contentious issue of debt relief for Athens will not be on the negotiating table, despite the long-held insistence by the Greek government that it be part of a bailout.
Instead, eurozone leaders have made a vague promise to “consider” the issue “if necessary” – but only after the bailout’s first review, which is unlikely to occur until November.
Even then, eurozone leaders have signalled they will only consider extending repayment plans on eurozone bailout loans – potentially with longer “grace periods” where no interest or principal at all is due – rather than full-scale writedowns advocated by the IMF.
How stable is the Tsipras government?
The governing Syriza party suffered significant defections in the two votes over the past week, forcing Alexis Tsipras to reshuffle his cabinet.
Many analysts believe it will be hard for Mr Tsipras to stay in power when he no longer has a majority of governing MPs voting for the bailout reform programme. But thus far, mainstream opposition parties – centre-right New Democracy, centre-left Pasok and pro-EU populist To Potami – have backed the measures, allowing Mr Tsipras to avoid calling elections.
Will that hold? New Democracy, the largest opposition party, is in the midst of a leadership fight, and Pasok has just picked a new leader with little national profile. That makes it unlikely they will push for snap elections.