With Greece’s finances deteriorating rapidly and its banks on the verge of collapse, the European Union has proposed a four-week bridging loan that countries including the UK have refused to back. Adding to the worsening outlook, the European Commission and the International Monetary Fund (IMF) said they had serious concerns about Greece’s debt load.
The increasingly desperate efforts to aid Greece underline the fragile nature of the deal struck in weekend negotiations to keep the country in the 19-nation euro region. The first challenge falls to Athens, where Parliament must back a package of austerity measures as a precondition to the country’s third bailout in five years.
“We had to negotiate a difficult agreement that includes both fiscal measures and reforms,” Finance Minister Euclid Tsakalotos told lawmakers in Athens on Wednesday as they began debating the package. Some measures “continue to be of a neoliberal bent that will affect many social groups, with a doubtful return in terms of growth”, he said.
With capital controls ravaging an economy that has already shrunk by a quarter since 2009, the prospect of choosing to support steps including streamlined sales taxes and curbs to the pension system has split Tsipras’s anti-austerity Syriza coalition. That means he will have to rely on opposition lawmakers to carry the vote, due at about 10pm local time.
Government 10-year bond yields in Spain, Portugal and Ireland narrowed by as many as 8 basis points on the prospect of a resolution to the standoff that has convulsed the euro area since Tsipras’s election in January. The currency declined by 0.1% to $1.1026 to the euro at 12.28pm in Frankfurt after dropping by 3% since June 18, when Tsipras said he was ready to reject a bailout with its associated conditions.
The measures demanded by creditors in exchange for aid have exacted a “heavy toll” and led to a dramatic deterioration in Greece’s ability to repay its debt over the past two weeks, a new analysis by the IMF showed on Tuesday. Greece as a result needs debt relief “far beyond” what the euro area has been willing to consider, including possibly deep “haircuts” on the value of Greek debt, it said.
That message was amplified by the European Commission on Wednesday in an assessment of Greece’s latest bailout request. It concluded that without further aid, the “financial stability risks for Greece will not be manageable and the banking sector will inevitably collapse”.
With the pressure rising for immediate aid to keep Greece from defaulting on the European Central Bank and its citizens next week, the EU proposed bridge financing of €7-billion using a bloc-wide fund. Acknowledging that this is a route UK Chancellor of the Exchequer George Osborne and his counterparts in Sweden and the Czech Republic have refused to accept, the commission is exploring ways to shield non-euro nations from the associated risks.
Facing party defections and with the deal already at risk of unravelling, Tsipras took to national television on Tuesday night to argue the case for an accord as Greece’s only choice.
“My priority is to make sure that the choice I made the other day, with a knife at my neck, is finalised,” Tsipras said in an interview with ERT-TV. – Bloomberg