In a shocking turn of events, Greek Prime Minister, Alexis Tsipras, submitted a bailout package to the European leaders on the evening of July 9th. This package included a deal for 53.5 billion Euros in additional bailout funds enough to shore up the loan payments of the beleaguered Mediterranean country for another 3 years. This is likely in the hopes that the Greek economy would improve by then and allow them to begin paying off the low interest rates that the European Central Bank and IMF have given Greece until this point.
Greece did not ask for this bailout as it turns out without offering something in return. Tsipras offered a package of reforms to go along with it. Much of these as it turns out were the very same type of reforms originally demanded by their EU counterparts with the proposal from two weeks ago, that was soundly rejected by the Greek people. Among these reforms include pension savings, tax increases and significant spending cuts. This proposal is now set to be discussed this coming Sunday at the summit with all of the European leaders in Brussels.
In exchange for these reforms, Greece is asking for their debt to be refinanced to a level that they can actually pay. This would be significantly lower than the rates they have presently. It still remains to be seen if this is a proposal that the rest of the Eurozone can accept, however. Creditors may want even more austerity measures to be put in place, but perhaps they have learned from their mistakes over the last few weeks. You cannot draw water from a stone, and it’s better to be repaid slowly at a lower rate than you expected than not repaid at all. If the creditors see the situation in this light remains to be seen.
Could This Crisis Be Coming to an End?
It’s still unclear what the creditors for Greece will be accept with this deal. A haircut of the debt appears to be out of the question, with Merkel in Germany saying as much earlier today. This debt will allow Greece breathing room until 2018 and will be sufficient to pay off the IMF loans and other creditors. They will then only owe funds to EU institutions. In addition, they agree to cut public pensions and increase sales tax (VAT) nationwide. Two key things austerity proponents have wanted for some time. Issues of trust still linger, with the EU Commission unsure that Greece will ultimately be able to guarantee passage and national acceptance of any terms reached, unless they include significant debt right down (something Germany adamantly opposes).
Greece is not offering this as just another short term bailout. They also want restructuring of their debt, and 35 billion EUR in funds for growth related programs domestically. Debt relief is still the end goal for Greece, and the US. Pressure has been mounting on Chancellor Merkel to offer such terms, as debt relief is seen as a key factor in ensuring Greece’s growth is sustainable. Unfortunately, this is a very unpopular policy domestically in Germany.
At first glance this may seem like a bad deal for Greece, but they in fact get to stay in the Euro, and will have a fighting chance at recovering from this over the course of the next 3 years. Yet, even though this is heavily in the middle of where the EU parliament wanted them to be, it’s unclear if Germany will ultimately accept it. Some form of debt relief is required, something Germany continues to strictly oppose.
Ultimately, there’s another factor at play here. Even if Tsipras gets his deal, as written, he still has to fight the battle back home of accepting these terms. Most of these reforms are what the Greek people already rejected.