LONDON (July 13, 2015) – Europe said Monday it will negotiate a new bailout for Greece after the country agreed to enact deep economic reforms under close supervision by its creditors.
The deal — if ratified — should prevent a chaotic Greek exit from the euro, an unprecedented event that would have shaken Europe to its core.
“EuroSummit has unanimously reached agreement,” tweeted Donald Tusk, president of the European Council and summit chairman.
Leaders of the 19 nations that use the euro hammered out the agreement at a marathon overnight meeting in Brussels, after weeks of frantic diplomacy sparked by Greece walking away from a previous bailout program.
That decision left it without the cash to make a payment to the International Monetary Fund, triggered the closure of its banks, and sent Greek economy into free fall.
Fast running out of money, Greece faced an awful choice: Accept the conditions demanded by the only people willing to lend it money, or crash out of the euro.
Speculation about the currency should now fade, but it’s not clear how soon the money the country desperately needs will flow, and when its banks will reopen.
The agreement means the Greek government must go way beyond a reform proposal it submitted last week, by making much more profound changes to pensions, energy, labor and product markets, and by scaling up a program of privatization. It also has to overhaul its public administration and justice system.
The crisis talks followed an ultimatum Europe gave Greek Prime Minister Alexis Tsipras last week: Show us you’re serious about putting Greek finances in order, or you’re out of the euro.
A breakdown in trust between Greece and other eurozone countries made for very tough talking. The emergency summit ran through the night, lasting 17 hours in total.
Europe and the IMF estimate Greece needs between 82 billion and 86 billion euros ($96 billion) over the next three years, according to a document drafted by the finance officials. They have already lent Greece about 233 billion euros since 2010.
Trust in Greece’s commitment to reform was shattered by January’s election of a prime minister fiercely opposed to austerity, the country’s default to the IMF, and a series of government U-turns in the last two weeks — including calling a referendum to reject reforms it then signed up to days later.
Monday’s deal requires Greece to give full access to bailout monitors on the ground in Athens, and agree to all relevant legislation in advance with creditors.
Tspiras was elected on promises to reverse austerity and end such intrusive monitoring, and the agreement will raise questions about whether he can continue in his post.
But without the prospect of a new bailout, Tsipras knew Greece’s descent into economic chaos would accelerate, bringing the country ever close to exit from the euro.
Greece’s banks have been shut for two weeks, and cash withdrawals are capped. The vital tourism industry is suffering. People are spending less, some public services have stopped charging, and the healthcare system is running out of imported medicines.
Greece needs to pay pensions and wages this week, and make a big debt repayment to the European Central Bank next week. Without an injection of funds fast, it may have to issue IOUs, a first step to printing its own currency.
The country isn’t home and dry yet. Tsipras has to push a first package of reforms — including tax changes pension reforms — through parliament in the next three days.
And it remains to be seen whether that will be enough to persuade the ECB to ease restrictions on funding for Greek banks imposed after Tsipras walked out of talks in late June, triggering the collapse of the previous bailout.
The package of reforms Greece proposed last week included spending cuts, tax hikes, and plans to phase out tax discounts on some islands, among many other things. Greece also planned some changes to public pensions, such as raising the retirement age, and steps to improve tax collection.
They were very similar to ideas put forward by the country’s creditors in late June before Tsipras walked out of talks, triggering the collapse of the last bailout and forcing the closure of the banks.
Europe is insisting that those first measures be made into law by July 15, or formal negotiations on a bailout won’t begin.
Assuming Greece accepts a broader overhaul of the economy, there are still other potential roadblocks standing in the way of a third bailout.
Tsipras went into the talks looking for a commitment from creditors to restructure its debt. An outright debt cancellation — or haircut — has been ruled out by Europe, although it may be willing to push back the date when Greece needs to begin repaying its bailout loans, and extending their maturities.
And there’s another potential hurdle: Opinion in some other countries that use the euro, including Germany and Finland, is running high against another rescue. Taxpayers don’t want to put more public money at risk. A new bailout would need to be ratified by parliament in Germany, and a handful of other countries.