After months of acrimony, Greece finally clinched a bailout agreement with its European creditors on Monday. If implemented, the deal will secure the country’s place in the euro and help to avoid a financial collapse.
The terms of the deal, however, will be painful both for Greeks and its radical left-led government, which since its election in January had vowed to stand up to the creditors and reject the budget cuts they have been demanding.
Before it can get 85 billion euros (US$95.07 billion) in bailout cash and support for its banks to reopen, the Greek government will have to pass a raft of austerity measures that include sales tax increases, reforms to pensions, and labour market reforms.
And, Greece will be on a tight timetable to implement its reforms—a reflection of how little its creditors trust the government to honour a deal. Greek Prime Minister Alexis Tsipras infuriated his European partners last month when he called for a popular vote against economic reforms the creditors has proposed.
The Greek people voted against those proposals, but will be horrified to see that they now face even tougher measures.
Both sides have acknowledged the bitterness that marked their negotiations. “Trust needs to be rebuilt,” says German Chancellor Angela Merkel, adding that with the deal, “Greece has a chance to return to the path of growth.”
In a first step toward getting its bailout loans, the Greek government has to pass a set of measures into law by Wednesday. Those measures include an increase in the sales tax and reform of the pension system.
Following that, Greece will have to open to competition industries that have long been protected, such as the energy sector, and labor laws will be made more flexible.
If it meets these requirements, Greece will get a three-year rescue program and a commitment to restructure its debt, which is unsustainably high at around 320 billion euros, or around 180% of annual GDP.
Tsipras argues that because of these concessions Monday’s deal is, despite the tough austerity, actually better for Greece than the proposals Greeks voted down just a week ago. “We managed to avoid the most extreme measures,” he says. “Greece will fight to return to growth and to reclaim its lost sovereignty.”
He also says he has managed to avoid a demand by some creditors to transfer Greek assets abroad as a form of collateral and to avoid the collapse of the banking sector.
Greeks seemed mainly relieved that the country was not facing financial collapse.
Kostas Lambos, a pensioner, said things would be “difficult in the beginning,” but that people had to understand the severity of the situation. “This was a necessary step for the country to emerge from the dead ends that had been created in the last few years.”
Greece’s banks, which have been shut for two weeks, were still closed on Monday and limits remained on cash withdrawals. Without a deal, they faced the prospect of collapse within days as they are steadily drained of money.
When the banks will be able to reopen will depend on whether the European Central Bank decides to increase emergency credit to Greek banks now that a bailout deal with Greece has been clinched in principle. It was unclear whether the ECB would make such a decision on Monday or after Greece passes its first batch of reforms.
“The Greeks have to show they’re credible, [and] show that they mean it,” says Jeroen Dijsselbloem, president of the eurogroup of Eurozone finance ministers, and a longtime critic of the Tsipras government.
The creditors say they will help Greece in the short term to deal with its debt repayments, since any bailout agreement isn’t imminent. Greece will need help making a 4.2 billion euro debt repayment on July 20, and it has been in arrears on about 1.5 billion euros owed to the International Monetary Fund since June 30.
If the talks had failed, Greece could have faced bankruptcy and a possible exit from the euro, the European single currency that the country has been a part of since 2002. No country has ever left the joint currency, which launched in 1999, and there is no mechanism in place for one to do so.
Greece had requested a three-year, 53.5 billion-euro ($59.5 billion) financial package, but that number grew larger by tens of billions as the negotiations dragged on and the leaders calculated how much Greece will need to stay solvent.
Greece has received two previous bailouts, totaling 240 billion euros (US$268 billion), in return for deep spending cuts, tax increases and reforms from successive governments. Although the country’s annual budget deficit has come down dramatically, Greece’s debt burden has increased as the economy has shrunk by a quarter.